Life Settlements

A life settlement is a financial transaction where the owner of a U.S. life insurance policy sells their policy to a third party for a lump sum payment. The payment is usually greater than the policy's cash surrender value but less than the net death benefit. Typically the policy holders are aged 65 or older. In addition, the policy being sold must be at least 2 years.

Life Settlements can provide a policyholder with a way to utilize the embedded value in their policy and gain financial flexibility. The proceeds from Life Settlements can be used for any expense including living expenses, medical or investments.

Under U.S. law, life insurance policies are considered transferable assets with specific legal rights, including the ability to:

Designate a beneficiary (provided the original beneficiary has an insurable interest in the insured's life)
Change the beneficiary designation (unless restricted)
Use the policy as collateral for a loan
Borrow against the policy
Sell the policy to a third party

In 2001, the National Association of Insurance Commissioners (NAIC) introduced the Viatical Settlements Model Act, which established guidelines to prevent fraud and ensure sound business practices. Around this time, many of today’s prominent life settlement providers began purchasing policies using institutional capital. A 2009 study by the U.S. Senate Special Committee on Ageing found that life settlements generally yield up to 8 times more than the cash surrender value offered by life insurance companies.

As consumer choice becomes increasingly important, the life settlement market has emerged as a practical alternative for policyholders who no longer need or can no longer afford their insurance policies. Many states are drafting or have passed legislation requiring insurance companies to inform policyholders (who are considering surrendering or letting their policies lapse due to nonpayment) about the availability of life settlements.

An emerging trend, encouraged by lawmakers in many states, is the use of life insurance policy sales to fund longterm care. Policyholders may be eligible for tax breaks or may have the proceeds from the sale excluded from means testing when determining state aid for longterm care.