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What Are Life Settlements & How Do They Work?

What Are Life Settlements & How Do They Work?

Did you know that roughly half of all Americans aged 55 or older have no retirement savings available? We are in a concerning time where many people struggle to make ends meet and in fact live paycheck to paycheck.

Unfortunately, the trend continues to retirement years and as such, the idea of selling your life insurance policy becomes an attractive, and sometimes the only, fallback option. Reasons for choosing a life settlement vary but some of the most common include unexpected emergencies or illnesses, difficulty meeting monthly premiums, and general living expenses during retirement.

As most people choosing this option are elderly with a lack of money saved for retirement, life settlements are also known as senior settlements.  

What are life settlements?

Simply defined, a life settlement is the sale of a life insurance policy to a third party for a lump-sum cash payment. It is a complex process resulting in a lump-sum cash outlay and the purchaser then becomes the beneficiary of the policy, taking over payment of all premiums until the death of the insured. At that point, the purchaser receives full value of the policy.

An easy way to understand the process is to think of your life insurance policy as personal property like your home or car. You purchased the policy earlier in your life and “own” it free and clear; as such, you can also sell it, just like a home or car or other property.

How does this all work? If a policyholder cannot afford payment of their existing life insurance policy or need an influx of funds, they can transfer ownership by selling it to what is known as an institutional investor. This is a person or organization that trades large share quantities of securities and every element of the policy is then in the hands of the investor. The former policyholder receives a large, one-time cash payment but the investor receives the final payout.

Why choose a life settlement?

In addition to the reasons stated above, other impetus for giving up a life insurance policy in exchange for cash payment include:

  • No further need for the policy. For an array of reasons, you might no longer need your life insurance policy for your dependents.
  • Getting behind on monthly premiums. Sometimes life insurance payments make it difficult to manage everyday expenses like groceries and medications.
  • Lapsed policy or notice of cancellation. These instances might result in a lower cash payment from an investor.
  • In the event of unexpected life emergencies such as severe illness or death of a loved one, a life settlement can help pay medical and related expenses.
  • Business-related scenarios involving cash buyout of a policy for a person no longer employed by a company.
  • A life settlement can help cover the high cost of assisted living, long-term care, or general living expenses during retirement.
  • If your beneficiaries are financially stable and don’t need your death benefit funds, opting for a life settlement can provide you with a boost in income.

Are you eligible for a life settlement?

A variety of factors are involved in determining eligibility for life settlements. The first and most important detail is the type of policy you currently have, as not all policies are eligible. The most common eligible policies include variable, universal, and convertible term.

Age and the policy’s value are also considerations. Policyholders must generally be age 65 or older with a policy valued at $50,000 or higher. Terminal illness or other significant change in health also factor into eligibility but invites further complexity best left to a professional and experienced company that can guide you through the process.

If you or your family member is considering in-home care as part of a plan to age in place, contact Family Matters In-Home Care today for a free consultation.  Our team is dedicated to supporting your family and helping older adults enjoy life in the comfort of their own home for as long as possible.

Some of the services offered by Family Matter In-Home Care include: Alzheimer’s & Dementia CareBed & Wheelchair Transfer AssistanceCompanionshipHousekeeping & Meal PreparationPersonal CareRecovery Care, and Transportation.

Serving the San Francisco Bay Area and Greater San Diego, Family Matter In-Home Care has offices throughout California including: Campbell, CARoseville, CASan Marcos, CA, and San Mateo, CA.

Carol Pardue-Spears

Carol has worked in the healthcare field for more than forty years. As a Certified Nursing Assistant, she worked for El Camino Hospital in the cardiac unit, Los Gatos Community Hospital, The Women’s Cancer Center in Los Gatos and several home health and hospice agencies. Carol founded Family Matters in 2002 to fill a deficit she witnessed in high-quality, in-home services and care.

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