The vast majority of life insurance policies are never claimed. They lapse—in other words, the holder of the policy stops paying premiums. On average, about 5% of life insurance policies lapse every year. That translates into more than $900 billion in benefits out of a total $20 trillion of in-force life insurance—every year.
Some of that is from term life insurance, which is intended to be held for a finite period of time. But much of it is from permanent (or “whole”) life insurance, intended to be paid out after the owner’s death. In total, 88% of universal life insurance is never claimed. Even for policies taken out after their owners were 65, 76% never materialize in the form of a death benefit.
Life insurance policies lapse for a variety of reasons. In some cases, the holder can no longer afford to pay the premiums. In other cases, the holder decides that the policy no longer serves its original purpose—for example, parents who buy policies to provide for minor children in the event of their death no longer need the policy after their children grow up.
What Is a Life Settlement, And Is It the Same as a Viatical Settlement?
Whatever the reason owners of life insurance policies consider them no longer viable, they sometimes opt to sell their life insurance policies to a third party investor for cash in what is called a life settlement. This is different from a viatical settlement. In both cases, the policy owner sells his policy for cash. In the case of viatical settlements, the policy owner generally has a life expectancy of two years or less.
What Is a Life Settlement Broker?
A life settlement broker facilitates the sale of a policy to a life settlement provider. In other words, if John, the policy owner, wants to sell his policy to Sam, the life insurance provider, he can hire Jim, the life insurance broker, to facilitate the sale.
It’s similar to the real estate market—the broker represents the interests of the policy owner, working with a number of providers to get the best deal possible for his client. The broker receives a commission, or percentage of the settlement amount. The percentage amount varies by broker. For this reason, it’s important to shop around for a reputable life settlement broker who cares about you and intends to treat you fairly, but it’s fair to say that a policy owner should always work with trustworthy broker to maximize the amount of the life settlement.
Is Every Policy Owner Eligible for a Life Settlement?
Different providers have different rules to determine what kinds of policies they’re willing to buy, but all consider three factors:
- The age of the policy owner: the older the policy owner, the more quickly the provider can claim the benefit. For this reason, life settlement providers generally prefer buying policies whose owners are at least 65 years old;
- The value of the policy: they typically are also looking at policies with a value of at least $100,000; and
- The type of policy: providers are interested in permanent life insurance policies, or term policies which can be converted into permanent policies.
On average, life insurance policies sell for 5-30% of the death benefit amount—in other words, if an owner has a policy worth $1 million, he would receive between $50,000 and $300,000 in a cash settlement—but several factors affect the amount of the settlement. These include:
- The amount of the policy: larger policies sell for more
- The age and life expectancy of the policy owner: providers pay more for policies whose owners are older and have shorter life expectancies—the longer the life expectancy, the more providers have to pay in premiums
- The premium amount: policies with lower premiums are obviously more valuable, and providers will pay more for them
- The market rate of return: life settlements are larger when interest rates are low, since during these times it costs investors less to finance the money they use to purchase policies
If you’re finding it increasingly difficult to pay your life insurance premiums, perhaps because you’re now on a fixed income, or if you feel your policy no longer serves the purpose for which you originally intended it, a life settlement can give you the money you need to pay costly medical bills, continue to live independently and spend more time with your family. Before you make the final decision to sell your policy, make sure you get the maximum amount of cash to which you’re entitled and protect your interests by working with a reliable and trustworthy life settlement broker.