Retirement Planning: Settlements

A life insurance settlement is the sale of a life insurance policy.  The money gained from such a sale can be used to fund a retirement.

•  Contents
• Benefitting both buyer and seller
• Settlements compared with surrender
• Senior settlements and viatical settlements
• Who are the buyers?
• How much money to expect

Benefitting both buyer and seller

Using a life insurance policy for a retirement fund means foregoing its death benefit, but that doesn't mean that its death benefit is of no value.  There are buyers who appreciate this fact, and they will offer you a percentage of your policy's face amount (death benefit) in exchange for ownership of your policy.

Following the exchange, the buyer will then make itself the policy's beneficiary and thenceforth will pay the premiums necessary to keep it in force.  You are no longer responsible for the policy.  Following your death, the buyer gets more than it paid for the policy; and in the meanwhile, you get to make use of a substantial sum of money.

Settlements compared with surrender

Typically, settlements can provide more money than surrender will.

In surrender, a cash value life insurance policy is terminated, and the policyholder keeps the policy's accumulated cash value, a sum considerably lower than the policy's face amount (death benefit) in most cases.  (Indeed, it is scarcely possible for cash value to catch up to face amount without breaking the federal guidelines which preserve life insurance's tax-advantaged status.)

Logically, then, any given settlement must offer more than the surrender value of the life insurance policy on the table.  Otherwise, it will not be accepted.

A notable difference between settlements and surrender is that, whereas surrender can only be performed upon cash value life insurance policies, any life insurance policy may be technically sold in a settlement (though it is far less usual in the case of non-cash value life insurance policies, since they provide no absolute certainty of a death benefit).

Senior settlements and viatical settlements

Because the buyer of your life insurance policy is obliged to maintain the policy in force for the rest of your life, its profit on any life insurance settlement depends on how much longer you live.  Chances are, you simply won't find a buyer for your policy unless your life expectancy is only a matter of years.

Senior settlements are life insurance settlements for insured individuals who are old enough that they are not expected to persist in living for a great many more years.  This may be an option for insureds as young as 65, even though many individuals these days can look forward to decades more of life.

Viatical settlements are life insurance settlements for insured individuals whose health is sufficiently poor that they are not expected to survive many years more.

Who are the buyers?

Policyholders typically sell to life settlement companies (often called "life settlement providers" or "viatical companies"), rather than to individuals.  Policyholders may work through a broker who will help them acquire the deal that benefits them most (similar to the way an agent helps a life insurance shopper find the most affordable policy).

Life settlement companies may turn around and sell policies to speculators or maintain the policies themselves.

How much money to expect

The first factor which determines the price of a settlement is the insured's life expectancy.  As longevity varies greatly from one individual to the next, so do settlements.  A policyholder with only a handful of years left to live may take in as much as 60–80% of the policy's face amount (death benefit) from a viatical settlement.  A policyholder who is elderly but still quite far from death's door may anticipate 20% or less.

The prices that life insurance settlements can command are also significantly influenced by the condition of the market.  During periods of economic downturn, investment drops, so there are fewer buyers (less demand).  Moreover, as recession depreciates existing investments, more seniors become obliged to sell their insurance policies in order to fund retirements, which results in more sellers (greater supply).  Both of these shifts reduce the value of life insurance settlements.