What is a Life Settlement?
Like a viatical settlement, a life settlement involves the sale of one's life insurance policy to a third party in exchange for cash. In a viatical settlement, the insured party is terminally ill, and generally must have less than two years to live. A life settlement, on the other hand, does not involve any terminally ill people. It is simply selling off the life insurance party (usually of a senior) to a third-party.
Is That Legal?
For now. Viaticals and life settlements are of questionable legality, since they seem to blatantly go against "insurable interest" laws, which are supposed to prevent people from taking out insurance policies on strangers as a form of investing or gambling. However, although many states are enacting legislation to regulate these types of sales, they are currently legal in most states, and have become a thriving industry.
Who Would Want to Buy My Life Insurance?
While life settlements can be purchased by anyone, seniors usually sell them to large firms that specialize in viaticals and life settlements. As there is currently a lot of legislation in the works regarding viaticals, there has been a growing market trend for the sales of policies that do not meet the technical definition of a viatical settlement (and thus escape regulations). But unlike a viatical, macabre as it may sound, there is no likelihood of death in the near future and therefore less chance of an immediate return, so typically life settlements involve much larger life insurance policies (in excess of $300,000, usually), and pay the insured person less for the policy then they would for a viatical.
Basically, a firm will pay you more than the cash surrender value of your policy, but less than the full benefit amount, and then pay all your premiums from them on.
Why Should I Sell My Life Insurance?
As people get older, many may have sudden financial difficultly, and the need for a quick infusion of income. Since trading your life insurance policy into the company will usually get you only 5 - 25% of the actual cash value, selling a life settlement can be a good way to stabilize your finances quickly, and no longer have to worry about premiums.
What are the Alternatives?
If you are within one or two years of your "projected life span" (as determined by your insurance company), there is a good chance you you can get accelerated benefits, which means your company will pay, in advance of your death, a significant portion of the death benefit that otherwise would be paid after death to the beneficiaries. The amounts vary, but can be as high as 80%, if the person has kept up with his payments and is in good standing. But if you do not meet the requirements for an advance benefit, and you need cash now, a life settlement may be something you want to consider.
Do I Need an Attorney?
The loose regulation of the life insurance investment world makes it ripe for various kinds of fraud, perpetuated on both the insurance companies and on the "viator" (person selling the insurance). Selling your life insurance policy for cash value involves a lot of important consumer issues, such as a fair valuation of the policy, proper income tax treatment, and the impact of the life settlement on eligibility for government assistance. If you are thinking of making any kind of viatical or life settlement then it is imperative you consult a business attorney with the laws of your state, who can guide you through the process and ensure you are getting a fair deal.