When you buy a life insurance policy, you are making a long-term financial commitment. If you ever find yourself in a situation where you can’t pay the premiums, you may have the option of selling it. This is called a life settlement. Life settlements have grown significantly over the past years and have a bright future in the business world.
It is usually people over 65 that take advantage of this option; in some cases, however, younger people can qualify if they have serious medical conditions. Universal life insurance policies for amounts of $100,000 or greater qualify but in some cases, even smaller term policies can be sold. A life settlement differs from a viatical settlement, which is for people 70 years or older and who have at least a $100,000 policy, have a terminal illness, or expect to live up to 24 more months. Also, surrendering a viatical settlement is different as you simply cancel the policy and take any cash value you have accrued.
If I wanted to sell my life insurance, I can either contact a direct buyer or connect with a broker. A broker will review eligibility and either provide you a quote or connect you with a broker who can. It is somewhat like a bidding process where you try to get the best price for the policy. Once you are connected with a buyer of your choice, you will turn the policy over to them and they will begin paying your premiums and give you the agreed-upon amount in a lump sum. Watch out for high commissions as they can eat up as much as 30% of your policy’s sale value.
Now let’s talk about eligibility. One of your best resources to get an idea of what is required to sell your policy is an organization called Life Insurance Settlement Association, or LISA. This is a nonprofit organization that provides information and guidance for those embarking on this process. 43 states and Puerto Rico regulate life settlements and cover about 90% of the population of the US. 30 states require a two-year waiting period before someone can sell a policy, and 11 states have a five-year waiting period.
Minnesota has a four-year waiting period. In most states, you can sell your policy before the waiting periods are over if there is a terminal illness, divorce, retirement, or a physical or mental disability. 20 of the 43 states that regulate life settlements follow the National Conference of Insurance Legislators Life Settlement Model Act.
This represents 53% of the US population. 12 states follow a hybrid of that same act along with other variations of state and federal laws involving life insurance. There are 12 states that regulate viatical settlements only. Some states have rigorous regulations requiring things such as getting multiple offers, proving that you have looked into alternatives, getting guidance on the tax implications, licensing of brokers and providers, and even having prior approval of the forms actually used.
Some states require that life settlement companies adhere to state and federal privacy laws and submit an anti-fraud plan for approval to prove the policies they purchase have not been obtained illegally. All of the above requirements are to ensure transparency and the legality of the sale.
Interestingly, even with all of the rigid requirements within states, since 2012, only two consumer complaints involving life settlements have been reported nationally. This shows the industry is being regulated well and the consumer is being protected.
There are a number of federal and state laws that impact someone’s eligibility and those have to be researched for each situation. Knowledgeable brokers will be aware of these individual state requirements and regulations and should keep you out of trouble, but due diligence on the part of the seller is advisable.
