The general rule of insurance is security against risks. It’s why a policyholder makes an insurance policy purchase from an insurance company, expecting reimbursement in times of losses. Life insurance is one of the oldest types of insurance available to a policyholder. Over the years, its significance has grown due to its cash value against life expectancy. A beneficiary of a life insurance policy can leverage it for lump sums known as life settlements. Many people find it hard to draw the line between these two terms, hence why we’ve devised this comprehensive guide to life insurance and life settlements.
What exactly is a life settlement?
A life settlement involves the sale of a life insurance policy at a discount to its face amount. It usually happens when a beneficiary outlives their life insurance policy. They may sell it for more than the policy’s death benefit to a third-party investor or financial institution such as a hedge fund.
The investor now becomes the policy owner, assuming responsibility for all future premium payments. A life insurance company establishes this transaction with term life insurance which guarantees the policy’s benefits to be paid to the investor. Term life insurance quotes are the estimates provided by the insurer concerning the price of a policy.
In the 1990s, when life settlements became a go-to for devastated AIDS patients, people would refer to payment as a viatical settlement.
So, is there a difference between life settlements and viatical settlements? A life settlement is a financial transaction where a policy owner transfers rights to an institutional investor for a cash settlement. On the other hand, a viatical statement is the sale of an existing life insurance policy at a discount from its cash surrender value. Usually, viatical settlements are reserved for those who are terminally ill. But with life settlements, you only need to be over the age of 70.
What are the pros and cons of life settlements and insurance?
A life settlement is a one-time cash transaction. For policy owners who no longer wish to bear the financial consequences of their premiums, this can be a cash cow. Also, lifetime settlements provide a way out of defaulting on your payments, leading to a total loss of the policy.
While the perks of life settlements seem too sweet to ignore, not everyone is cut out for it, especially for those who owe creditors. It’s a given that your life settlements will reach your creditors first before hitting your account. There have also been cases where life settlement beneficiaries were declared ineligible for some government support like Medicaid.
With life insurance coverage, the money invested is returned in full as the sum assured at the end of the term or after the insured’s death. It has become a viable option for several retirees in the U.S because of its tax and credit benefits. You may be able to take a loan against it in times of emergencies, depending on the type of life insurance you purchased.
Besides the financial protection against death, life insurance can become a monthly income for policyholders. However, the returns on some life insurance policies like whole life policies are usually insignificant compared to other insurance policy types. The amount of coverage in whole life insurance is usually watered down due to its investment-cum-protection arrangement.
There’s another disadvantage of life insurance policies that most people tend to overlook. Life insurance policies come with specific coverage exclusions like death from drug use, etc. They’re not comprehensive. Your life insurance policy may refuse to pay your benefits in such cases.
What are the parameters of a good life settlement?
Life settlement transactions may require legal parameters. In effect, the application process varies from one insurance provider to the next. Here are some general conditions you may need to adhere to:
- Ages must be between 75–85 or above with health changes since the policy was issued.
- Must have premiums of less than 5–6 percent of death benefits to maturity.
- Policies must have a net death benefit of $250,000 or more (no maximum).
- The policy owner can either be the insured, a trust, or a business entity.