What is a Life Settlement? | Welcome Funds (2024)

FAQs

What is a Life Settlement? | Welcome Funds? ›

A life settlement

What is a Life Settlement? A life settlement is the sale of a life insurance policy to a third party called a life settlement provider. The owner of the life insurance policy sells the policy to the life settlement provider and receives an immediate payment in return.

That assumes a payout rate of 25%, the midpoint of the typical life settlement payout range of 20% to 30% of the policy's face value.

Typically, this sale results in a lump-sum cash payment of four or more times the policy's cash surrender value. After a life settlement is complete, the new policy owner will be responsible for future premium payments and will control the policy's death benefit.

Getting life settlement quotes

If the sum of the cost to maintain the policy plus the expected return on investment for the new owner is lower than the policy's death benefit, the difference in those two values is what the life settlement company can offer as the purchase price for the policy.

If you're in need of immediate cash, you may be tempted to turn to your structured settlement fund and take all the proceeds at once. Before making such a big decision, consider the pros and cons. You'll pay a fee to cash out and may jeopardize your future financial security.

The primary risks in managing a portfolio of life settlements include longevity, liquidity, valuation, and carrier risk.

Cons: The lump sum payment you receive could be taxed as income. Accepting a life settlement could negatively impact any state or federal public assistance (like Medicaid) that you receive or are eligible to receive.

If you have a policy with a high cash value and you don't need the coverage, it may be worth it to cash out. If you simply need access to cash, there may be better ways to come up with the money such as taking a policy loan. That way you still keep insurance protection for your heirs.

A life settlement company will use actuarial tables to help calculate your life settlement payout based on your age and your health condition. The type of policy you own (term, whole, universal life) and the policy's death benefit amount are also considered.

How much do you get if you sell a $100000 life insurance policy? ›

That means if your policy has a $100,000 benefit, you might receive $20,000 from selling it. Life settlement companies base their offers on many of the same factors life insurance companies use to determine your premiums.

In a nutshell, whatever net proceeds you receive from the settlement is taxed as a long term capital gain. If you've held the asset (your policy) for a year or less, it counts as short-term capital gains; over a year, and you're talking long-term capital gains.

The life settlement provider becomes the policy owner, must pay any premiums that are due, and eventually collects the full amount of the death benefit from the insurance company.

But it's less than the actual death benefit. It's typical for a life settlement to pay anywhere from 10% to 25% of the policy benefit amount. So if you were to sell a $200,000 policy you may get anywhere from $20,000 to $50,000 in cash.

The average life insurance payout in the U.S. is about $168,000, according to Aflac. However, the payout of your life insurance policy will depend on the face amount (death benefit) you choose and any money accelerated, borrowed against or withdrawn from the policy prior to the payout.

A life settlement, sometimes also called a senior settlement, involves selling an existing life insurance policy to a third party—a person or an entity other than the company that issued the policy. The policy holder (seller) receives an immediate payment from the third-party offering the settlement.

A settlement fund is an account where the defendant's payment holds (escrow) funds payable to the plaintiffs. Informal settlement fund escrow accounts have become less common due to their limitations compared to Qualified Settlement Funds (“QSFs”).

When you buy securities, you're paying for them with money in your settlement fund. When you sell securities, the proceeds from the sale go directly into your settlement fund on the settlement date.