The process of selling a life insurance policy to a third party company in exchange for a lump sum cash payment is the meaning of the term ‘life settlement.’
After the settlement, the third party, such as an institutional investor who buys the policy from the policyholder, is entitled as the beneficiary of the policy and is now responsible for paying the policy premiums.
In this article, you can get all the information on the process of selling a life insurance policy for cash. This has become possible because the life insurance policies are treated as assets or property just like any others.
It all began in 1911 when the United States Supreme Court took a monumental decision in the Grigsby vs. Russell case. The honorable court recognized the right of the policy owner to assign his/her life insurance policy. Justice Oliver Wendell Holmes acknowledged that a life insurance policy is akin to any other property. The policy owner has all the rights to change the beneficiary of the policy, take a loan using the policy as collateral, borrow money against the policy, or sell the life insurance policy for cash.
The life settlement market flourished in the 1980s during the AIDS epidemic. The AIDS victims who owned life insurance policies faced short life expectancies.
Hence, they chose to liquidate their insurance policies as they no longer needed it. Selling a life insurance policy for cash is just one of the ways in which a policyholder may cash in his/her policy.
Prior to 1911 when the life settlement industry didn’t exist, policyholders who sold their insurance policy which they no longer could afford or need would receive a very small amount.
Policyholders can sell their life insurance policies for several reasons such as-
- When they can no longer afford to pay the policy premiums.
- When the term insurance policy is nearing the end of the specified coverage period.
- When they face a financial crisis, and they need funds to live a better retirement life.
- When they are in dire need of funds to support various medical facilities such as purchasing medicines, undergoing an expensive procedure, or paying for senior care services like nursing home care/home care.
- When they no longer need to invest in long-term care.
- When they do not prefer to continue paying the premiums but would still like to have insurance coverage, they can choose an option known as “retained death benefit.” In this option, the policyholder can sell a portion of the death benefit of the insurance policy for a cash settlement instead of selling the entire policy for a one-time cash settlement.
Life settlements can provide several benefits to the policy owners.
- Instant relief to the policyholders from paying premiums for an unaffordable life insurance policy.
- The policyholders can enjoy a better lifestyle as they receive a substantial amount which is higher than the cash surrender value of the life insurance policy.
- Policyholders can invest in their long term care. They can choose from a wide range of healthcare options, buy medicines easily, and also afford medical procedures/operations.
- The policyholder can also choose to donate the money received to the charity of their choice.
Selling a life insurance policy for cash is just one of the multiple options that policyholders can choose from. The other options are-
- Borrowing against cash value: In an emergency, a policyholder may wish to borrow a portion of the policy’s cash value. This loan taken out of the cash value of the policy has consequences; interest on the loan and repayment without a stipulated amount of time.
- Surrendering the policy: The policy owner may choose to surrender his/her policy at will, and he/she has a less expensive alternative or may no longer need the policy. Surrendering the policy removes the death benefit; hence this step must be chosen with caution.
- Withdrawing from the policy’s cash value: This is an alternative option for borrowing money from the cash value of the insurance policy. Depending on the policy and its terms and conditions, policy withdrawals may have several effects on it.
- A life settlement is one of the most widely popular options which involve a third party institution buying the policy for one-time cash settlement.
I hope this article helps you to take better decisions in terms of life settlements. Thank you for reading!