Life Insurance Policies are a VALUABLE Asset. During difficult financial times, a life insurance policy settlement is a viable option that should always be considered before digging into one’s investment portfolio; or worse, simply letting a policy lapse or surrender.
What Is a Life Settlement?A life settlement refers to the sale of an existing insurance policy to a third party for a one-time cash payment. Payment is more than the surrender value, but less than the actual death benefit. After the sale, the purchaser becomes the policy's beneficiary and assumes payment of its premiums. By doing so, he or she receives the death benefit when the insured dies.
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How Life Settlements Works
When an insured party can no longer afford their insurance policy, they can sell it for a certain amount of cash to an investor—usually an institutional investor. The cash payment is primarily tax-free for most policy owners. The insured person essentially transfers ownership of the policy to the investor. As we noted above, the insured party receives a cash payment in exchange for the policy—more than the surrender value, but less than the policy's prescribed payout at death.
By selling it, the insured person transfers every aspect of the policy to the new owner. This means the investor who takes over the policy inherits and becomes responsible for everything related to the policy including premium payments along with the death benefit. So, once the insured party dies, the new owner—who becomes the beneficiary after the transfer—receives the payout.
By selling it, the insured person transfers every aspect of the policy to the new owner. This means the investor who takes over the policy inherits and becomes responsible for everything related to the policy including premium payments along with the death benefit. So, once the insured party dies, the new owner—who becomes the beneficiary after the transfer—receives the payout.
Other reasons for choosing a life settlement include:
Life settlements effectively create a secondary market for life insurance policies. This secondary market has been years in the making. There have been a number of judicial rulings that have legitimized the market.
One of the most notable being the 1911 U.S. Supreme Court case of Grigsby v. Russell. John Burchard was not able to keep up the premium payments on his life insurance policy and sold it to his doctor, A. H. Grigsby. When Burchard died, Grigsby tried to collect the death benefit. The executor of Burchard's estate sued Grigsby to get the money and won. But the case ended up in the Supreme Court. In his ruling, Supreme Court Justice Oliver Wendell Holmes likened life insurance to regular property. He believed the policy could be transferred by the owner at will and it had the same legal standing as other types of property like stocks and bonds.
In addition, he said there are rights that come with life insurance as a piece of property:
• The owner can change the beneficiary unless the insurer has restrictions in place.
• The policy may be used as collateral for a loan.
• Owners can borrow against the insurance policy.
• Policies can be sold to another person or entity.
One of the most notable being the 1911 U.S. Supreme Court case of Grigsby v. Russell. John Burchard was not able to keep up the premium payments on his life insurance policy and sold it to his doctor, A. H. Grigsby. When Burchard died, Grigsby tried to collect the death benefit. The executor of Burchard's estate sued Grigsby to get the money and won. But the case ended up in the Supreme Court. In his ruling, Supreme Court Justice Oliver Wendell Holmes likened life insurance to regular property. He believed the policy could be transferred by the owner at will and it had the same legal standing as other types of property like stocks and bonds.
In addition, he said there are rights that come with life insurance as a piece of property:
• The owner can change the beneficiary unless the insurer has restrictions in place.
• The policy may be used as collateral for a loan.
• Owners can borrow against the insurance policy.
• Policies can be sold to another person or entity.
Special Considerations
Life settlements effectively create a secondary market for life insurance policies. This secondary market has been years in the making. There have been a number of judicial rulings that have legitimized the market.
One of the most notable being the 1911 U.S. Supreme Court case of Grigsby v. Russell. John Burchard was not able to keep up the premium payments on his life insurance policy and sold it to his doctor, A. H. Grigsby. When Burchard died, Grigsby tried to collect the death benefit. The executor of Burchard's estate sued Grigsby to get the money and won. But the case ended up in the Supreme Court. In his ruling, Supreme Court Justice Oliver Wendell Holmes likened life insurance to regular property. He believed the policy could be transferred by the owner at will and it had the same legal standing as other types of property like stocks and bonds.
In addition, he said there are rights that come with life insurance as a piece of property:
• The owner can change the beneficiary unless the insurer has restrictions in place.
• The policy may be used as collateral for a loan.
• Owners can borrow against the insurance policy.
• Policies can be sold to another person or entity.
One of the most notable being the 1911 U.S. Supreme Court case of Grigsby v. Russell. John Burchard was not able to keep up the premium payments on his life insurance policy and sold it to his doctor, A. H. Grigsby. When Burchard died, Grigsby tried to collect the death benefit. The executor of Burchard's estate sued Grigsby to get the money and won. But the case ended up in the Supreme Court. In his ruling, Supreme Court Justice Oliver Wendell Holmes likened life insurance to regular property. He believed the policy could be transferred by the owner at will and it had the same legal standing as other types of property like stocks and bonds.
In addition, he said there are rights that come with life insurance as a piece of property:
• The owner can change the beneficiary unless the insurer has restrictions in place.
• The policy may be used as collateral for a loan.
• Owners can borrow against the insurance policy.
• Policies can be sold to another person or entity.
Life Settlements vs. Viatical Settlements
Policy sales became popular during the 1980's, when people living with AIDS had life insurance they no longer needed. This led to another part of the industry—the viatical settlement industry, where people who have terminal illnesses sell their policies for cash. When someone becomes terminally ill and has a very short life span, they may sell their life insurance to someone else. In exchange for a large lump sum of money, the buyer takes on the premium payments, becoming the policy's new owner. After the insured party dies, the new owner receives the death benefit.
Viatical settlements are generally riskier because the investor basically speculates on the death of the insured. Even though the original policy owner may be ill, there is no way of knowing when he or she will actually die. If the insured person lives longer, the policy becomes cheaper, but the actual return becomes lower after factoring in premium payments over time.
Viatical settlements are generally riskier because the investor basically speculates on the death of the insured. Even though the original policy owner may be ill, there is no way of knowing when he or she will actually die. If the insured person lives longer, the policy becomes cheaper, but the actual return becomes lower after factoring in premium payments over time.
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