How Do Life Settlements Work?

Life settlements involve the sale of a life insurance policy by the policy owner to a third party. Increasingly, senior citizens engage in life settlement contracts because this seems appropriate, based on their personal financial goals. Often, the decision to sell a life insurance policy emerges because the policy owner believes they no longer need the policy and/or they no longer can afford the policy.

The life settlement process involves several steps.

First, it is important to learn about life settlements and determine if the decision to sell your life insurance policy is appropriate for your financial plan.

It is important to note that, after you sell your life insurance policy, it is no longer necessary for you to pay insurance premiums for that policy. The new policy owner is responsible for these premiums.

Second, one must identify a prospective purchaser for one's life insurance policy. Usually, during this step one develops a relationship with a life settlement broker. The life settlement broker, in turn, shares information about the life insurance policy and the insured person's age and life expectancy in order to solicit an offer by one or more life settlement companies.

Third, the life insurance owner either accepts or rejects the purchase offer from the life settlement company. When the owner rejects the offer, they retain ownership of their policy. When the owner accepts the offer, in exchange for the transfer of policy ownership and rights, they receive a lump sum payment from the new owner.

The amount of this lump sum payment is contingent on the buyer's perceived value of the policy and the life expectancy of the insured. No upfront fees for the seller are associated with the sale of the life insurance policy that changes ownership during a life settlement contract.

A life insurance policy owner always has certain rights. One of these is the right to manage this policy as the policy owner. The new policy owner has the right to decide whether to let the policy lapse or to keep the policy in force, by paying the premiums. The new policy owner has the right to name the beneficiary of the policy, to borrow against the policy, to sell the policy to another company or party, and to use the policy as collateral for a loan.

Of course, the new owner's decision about how best to manage the policy once it is their property, does not affect the value of the policy so far as the price you receive at the time you sell this policy. Once you are paid for the life insurance policy, the life settlement company is the new policy owner. Since this policy is, now, their property and their responsibility, the new owner will decide who benefits from the terms of the policy.

The person who sells this policy to the new owner also has rights. The seller may use the proceeds they derive from the sale of their insurance policy in any fashion they choose--and they are not required to be above or below certain asset or income levels in order to qualify for the life settlement.

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