A life settlement is when someone sells an existing life insurance policy to a third party for more than its cash surrender value but less than its net death benefit. Why do you need to know about life settlements? If you ever find yourself holding a policy that you no longer, want, need or can afford, you can sell the policy.

Life settlements are an important resource for people whose financial circumstances change. Since medical issues are taken into account (because life settlements are based, in part, on life expectancy), people younger than 65 facing life-threatening health issues may also qualify for a life settlement.

Life insurance products evolve, just like many other financial products.  And the latest life policy models offer consumers more than even policies did just a few short years ago.
In many cases, high-net-worth individuals use life settlements to reinvest in a newer “model” of life insurance (though they may be used for any purpose).

Today, savvy financial planners and other life insurance pros regularly help clients through life settlements, but a lot of consumers still don’t know what questions to ask.  And, unfortunately, a lot of agents have not learned about settlements the way they should.

Just knowing about life settlements helps potential life insurance purchasers of any age understand the true value of life insurance, and may help you make a more informed policy purchase once you know your life insurance investment is not “locked” until your passing. Previously, your only choices were to lapse a policy, surrender it for the little cash value it held…or keep paying premiums to keep it in force.

Of course, if you or a loved one or someone you advise does end up considering a life settlement, they should be fully informed and aware:

•    Proceed with caution when making any major financial decision, especially one that deals with the disposal of benefits that may or may not be replaceable (like life insurance).

•    Ask yourself, “Do you still need the life coverage you are considering selling?” If so, a life settlement may not be for you.

•    Independent tax, financial planning and legal advisors to whom you turn for settlement advice should themselves be knowledgeable about the settlement process.

•    If your advisors are not familiar with life settlements, urge them to partner with a reputable settlement company or another (tax, accounting, financial planning or legal) professional who does have settlement experience. Membership in LISA, the oldest and largest non-profit life settlement industry group, demonstrates a willingness to invest in the industry and strive for high standards.

•    All parties to a settlement should be appropriately licensed, as applicable and appropriate. You can check with your state insurance department to ensure various life settlement entities are licensed. (As implied here: Life settlement licensing is handled on a state, rather than federal, level.)

•    Receiving any lump sum of cash may affect other benefits you receive; keep this in mind when considering any transaction that generates an influx of cash.

•    Rare individuals – known as “accredited investors” in regulatory-speak – invest in settlements, but it is not and should not be an option for most folks. Investment in life settlements is best left to institutional investors.

You may never need to exercise the life settlement option but information is power, and it’s especially important to be armed with information when it comes to major financial decisions. Besides, won’t it make for good cocktail party chatter when you inform someone they can collect on their life insurance while they’re still living?

M. Bryan Freeman has helped people sell their life insurance for 18 years. In 2006 he was recognized by both houses of the Georgia Legislature for his international settlement industry leadership, including the completion of four terms as president of the Life Insurance Settlement Association.  That same year he founded Atlanta-based Life Settlement University. He can be reached at 888-874-2402 or through his company’s site, www.HabershamFunding.com

Please note:
The information provided here is not meant to be a substitute for professional insurance or legal advice. Always check with a financial, legal, tax or other advisor before making any major financial decisions.