Senior citizens may learn about chances to get cash for their life insurance policies. These deals are called life settlements or senior settlements. In these deals, you sell your life insurance policy to someone else who is not your insurance company. You get money right away from the buyer.
If you want to sell your life insurance or if someone has asked you to sell it, you need to stay safe. Learn about your current policy, understand any offers you get, and know how brokers get paid.
What Are Life Settlements?
When you own a life insurance policy you don’t want anymore or can’t pay for, you have choices. You can give it back to get cash value or let it end. Life settlements give you a third choice: sell your policy to someone other than your insurance company.
State insurance departments watch over life insurance. The SEC and FINRA also watch some types of policies. Most states have rules for life settlements, but not all deals are watched by regulators. You should check if the buyers are licensed and follow rules.
Companies that buy life settlements are usually big businesses. They either keep policies until the person dies or sell them to other investors like hedge funds.
When you sell, you get a lump sum of money. How much you get depends on your age, health, and your policy details. You usually get more than the cash surrender value but less than the death benefit.
The buyer also agrees to pay future premiums as long as you live. When you die, they get the death benefit.
Things to Think About Before Selling
A life settlement might work for you if you don’t need your policy anymore or can’t afford the payments. But be careful. Here’s what to consider:
Do You Still Need Life Insurance? If you want to buy a new policy with the money, can you get one with the same coverage? How much will it cost? Your old policy will still exist with the new owner, which might make it harder to get more insurance. New policies often cost more because you’re older or your health has changed. If you want to keep coverage but pay less, you might reduce your current coverage or do a “1035 Exchange” instead.
Cheaper Options. If you need cash, you have other choices besides selling or surrendering your policy. You might borrow money against your policy. You might also qualify for accelerated death benefits if you have a serious illness. Ask your insurance company about these options before selling.
Hard to Know Fair Prices. It’s tough to know if you’re getting a good price for your policy. The best way is to shop around. Contact several life settlement companies, use a licensed broker to shop for you, or ask your financial advisor. You can also use online tools to get estimates, but this might lead to sales calls.
Money Impact. The money you get might be taxable depending on your situation. It might also affect your ability to get government help like Medicaid.
Impact on Your Family. Think about your need for money now versus what your family might need later. Even if they don’t need the insurance money now, could that change? Can you get the money you need from other sources?
Your Health Information. Buyers might see lots of personal information about you, including your health records. This information might be shared with others. You might need to give health updates regularly.
How to Protect Yourself
If you decide to sell your policy, protect yourself by asking these questions:
1. Who are you working with? Many states require life settlement companies and brokers to have licenses. Only certain financial professionals can handle variable life settlements. Check with your state insurance department to see if the company or broker is licensed and if they have complaints against them. Use FINRA BrokerCheck to research financial professionals. Stay away from companies with lots of complaints.
2. What happens to my policy? Ask what the buyer will do with your policy. Will they keep it? Sell it alone? Or bundle it with other policies and sell pieces to investors? The final buyer will pay premiums and get the death benefit when you die.
3. What information must I give? To whom? For how long? You must allow access to medical and personal information so buyers can decide what to offer. Once they have this information, they might share it with lenders or other investors.
4. How can I keep my information private? Read all papers carefully. Make sure the company protects your private information. If your information will be sold, ask to whom and if end buyers will see your personal details. If you use a broker, find out which companies they work with and ask about everyone’s privacy rules. Many states have rules about protecting private information. Contact your state insurance department to learn what rules apply.
5. What’s the best price for my policy? If using a broker, ask what offers were received and what they did to get you the best price. If someone contacts you to sell your policy, understand their role. Are they a broker who works for you, or do they work for a specific company? If they work for one company, you might only get one offer, making it hard to know if the price is good.
6. What are the costs? Life settlements can have high fees, and people who sell them can make big commissions. Ask how the person helping you gets paid and think carefully if this is really your best choice.
7. Can I change my mind? Some states let you change your mind within a certain time if you accept an offer and later regret it.
8. Am I being rushed? If you feel pressured to decide quickly or face aggressive sales tactics, be careful. Good professionals will answer your questions clearly and give you time to make a smart decision.
Frequently Asked Questions
What are the disadvantages of a life settlement?
Life settlements have several drawbacks you should know about:
- Loss of death benefit – Your family won’t get the insurance money when you die
- High fees – Brokers and companies charge large commissions, sometimes 20-30% of the sale
- Tax consequences – The money you receive may be taxable as income
- Privacy concerns – Buyers get access to your medical records and personal information
- Future premium costs – If the buyer stops paying premiums, the policy could lapse
- Affects government benefits – The lump sum might reduce your eligibility for Medicaid or other assistance
- Hard to reverse – Once sold, you usually can’t get your policy back
What are the benefits of a life settlement?
Life settlements can offer some advantages:
- Immediate cash – Get money right now instead of waiting
- More than surrender value – Usually pays 2-5 times more than surrendering your policy
- No more premium payments – The buyer takes over all future payments
- Flexibility – Use the money however you want
- Option for unwanted policies – Better than letting a policy lapse with no value
- May help with expenses – Can pay for medical bills, living costs, or other needs
What is the average payout for a life settlement?
Life settlement payouts vary widely based on several factors:
- Typical range – Usually 10-25% of the death benefit amount
- Age matters – Older policyholders typically get higher percentages
- Health status – Shorter life expectancy means higher offers
- Policy size – Larger policies ($100,000+) usually get better rates
- Policy type – Universal and whole life policies often get better offers than term life
Examples:
- A healthy 70-year-old might get 12-18% of their policy’s death benefit
- A 75-year-old with health issues might get 20-25%
- Policies under $100,000 may not qualify at all
Always get multiple quotes to ensure you’re getting a fair offer.
Can life insurance be used to pay off debt?
Yes, life insurance can help with debt in several ways:
While you’re alive:
- Life settlements – Sell your policy and use cash to pay debts
- Policy loans – Borrow against your cash value (usually at low interest rates)
- Cash surrender – Cancel your policy and take the cash value
- Accelerated benefits – If terminally ill, access death benefits early
After you die:
- Your beneficiaries can use the death benefit to pay off your remaining debts
- This protects your family from inheriting your debt burden
Important considerations:
- Debt payments reduce what your family receives
- Some debts (like federal student loans) may be forgiven when you die
- Consider if paying debt now is worth losing future death benefits
- Consult a financial advisor to compare all options
Life insurance is often better kept for your family’s security rather than used to pay off debt, unless you have no dependents or other pressing needs.
Getting Help
If you have questions or want to complain about a life settlement, contact your state insurance department. If your complaint is about a registered financial professional, you can also file a complaint with FINRA.
