CHAPTER 4. WHO QUALIFIES FOR A LIFE SETTLEMENT?
You might be asking – if life settlements can be such a good deal, why aren’t more people taking advantage of them? More people are taking advantage of the possibility to sell their life insurance, and the life settlement industry is growing, but the point is taken. The fact is that while there might be many people wanting to sell their life insurance policy, not everyone qualifies for a life settlement, or they don’t qualify for a life settlement offer that is worth more than a cash surrender option offered by their insurance company for their policy. Here are the factors that determine if you qualify for a life settlement and what the offer might be like.
First of all, most life insurance policy buyers are interested in seniors 65 years of age or older. A person’s age is probably the most important factor, as life settlement offers are calculated based on the insured person’s life expectancy. Simply put – the older you are, the more qualified you will be for a life settlement. Those younger than 65 but with serious medical conditions that limit or lower life expectancy can also qualify. Age and medical history are the most important factors that determine whether a prospective seller meets the criteria for offers for their life insurance policy.
Second, the policy being sold should have a death benefit of at least $100,000. Any less, and it’s too low for most potential buyers to be interested – the margins are too low and the potential to lose money too high for such a life insurance policy to be an attractive asset. Remember that it costs a not-insignificant amount of money for the buyer to conduct due diligence on the seller and their policy. The larger the death benefit, the better.
There is also a “minimum number of years” that a policy has to have been owned in most jurisdictions before it can be sold in a life settlement. In some states, such as California, it is two years, while in Minnesota it’s four years and in Nevada – five. This is a measure designed to prevent people from simply buying a life insurance policy with the intention of selling it as soon as possible. Some exceptions can apply, but these vary on a state-by-state basis, and you should consult a financial advisor or broker about it.
Finally, whole life, universal, or convertible term life insurance policies are the overwhelming majority of life insurance policies that are successfully sold and bought. Other types of life insurance are simply not attractive and are too risky for most buyers to be interested in them. Premium financed and standard term policies, for example, usually don’t qualify for offers. Group policies qualify if they’re of the permanent or convertible term type.
Who Sells Life Insurance?
The majority of situations where someone is interested in selling their life insurance usually fit into one (or more) of the following three categories – an unaffordable policy, a need for liquidity, or an unneeded policy.
Many seniors find themselves paying premiums that they can’t really afford to keep their policy active. This can occur because of two reasons – either the financial situation of the insured has changed, with pressing and unavoidable expenses (such as healthcare, for example) taking up a larger amount of financial resources than before, or the premiums have gone up as the insured has aged, something which is common with universal life insurance policies. In this case, it might make more sense to get rid of an unaffordable life insurance policy while receiving a cash payout in a life settlement than to keep it current and paying premiums, with the risk that further down the line it would become even more unaffordable.
The same increase in expenditure in the form of medical costs is a common reason why seniors might want more financial liquidity. So as to not burden children, grandchildren, or other relatives with the costs of medical care, and to maintain or increase the quality of their life while still alive, a senior may choose to sell their life insurance policy and receive a payment that will help them to cover those costs. If a retiree is suffering from loneliness during cold Northeast winters spent in an empty home, a life settlement could help improve their quality of life drastically by allowing them to move to a sociable and warm retirement community in Florida.
Finally, the need for coverage might simply decrease to such an extent that it’s not necessary to keep paying for a life insurance policy. If the insured’s spouse was the beneficiary of the policy, but has passed before the insured, or if the insured’s children are now financially independent and stable and don’t need the financial boost or safety net that a life insurance benefit would provide – it makes sense to liquidate the policy, instead of to continue paying for it.
INTRODUCTION TO LIFE SETTLEMENTSCHAPTER 2.
LIFE SETTLEMENT COMPANIES – BROKERS AND PROVIDERSCHAPTER 3.
СOMMON CONCERNSCHAPTER 4.
WHO QUALIFIES FOR A LIFE SETTLEMENT?CHAPTER 5.
HOW MUCH IS MY LIFE INSURANCE POLICY WORTH?CHAPTER 6.
ALTERNATIVES TO LIFE SETTLEMENTSCHAPTER 7.
THE LIFE SETTLEMENT PROCESS