What is a life settlement?
Are you or someone you know currently paying high premiums on a life insurance policy that you simply can’t afford anymore?
This is the exact situation of thousands of people today, but they realize the bad consequences of stopping the payments. If they do, then chances are the policy itself will very likely vanish into thin air, and all of those payments they’d made over the years would have been in vain.
Surprisingly, well over 90% of all life insurance policies end up disappearing like this. But, one of the best alternatives would be to sell your life insurance policy to a third party, a method that is called making a life settlement, continue reading below will help you answer the question “what is a life settlement”
How does a life settlement work?
A good example of how a life settlement arrangement works is to look at a retired person who is, say, in their late 70’s. Let’s say that this man’s name is Randy, he has a wife who has passed away, and his children are well off, working good jobs, have houses, etc.
While Randy was working, he had paid on a $5 million life insurance policy during his entire employment at the company. Now that he has retired, the premiums are simply too high priced for him, and the truth is Randy simply needs some money right now for immediate bills.
Randy thinks about it a while, then decides to sell his $5 million life insurance policy to a life settlement investor for an immediate one-time lump sum payment of $500,000. With that, the investor will now reap the benefits of Randy’s policy after he dies.
The senior retirement income gap
When a person retires, they will likely receive things like social security and/or a pension. Still, they need to determine what their income gap will be to make sure that the money they have will last them for the rest of their life.
Doing a life settlement deal with an investor can give a retired person much-needed peace of mind financially. They won’t have any more high life insurance premiums to pay, and the only party that actually loses will be the fat, rich insurance company that has received large payments for so many years already anyway.
Some people question whether or not doing a life settlement with a well-compensating investor is morally right. Will the investor just be sitting around waiting on the person to die? Or, do they simply realize that everyone will eventually die, and see this large payment as helpful financial freedom that they are providing for a struggling retired person in need?
Cash surrender value vs life settlement value
Whenever a person spontaneously cancels their life insurance policy, the cash surrender value is the amount of money that policyholder will receive. This amount will generally be whatever the actual cash value of the policy is, but there will be multiple fees associated with the premature cancellation.
The decision that the policyholder makes will be based on which of these two options has the best financial benefit and gives them the most long-term satisfaction.