Life Settlement
Contents
Demystifying Life Settlements: A Comprehensive Guide
Unveiling Life Settlements: An Overview
Understanding Life Settlements: Life settlements involve the sale of an existing life insurance policy to a third party for a lump sum cash payment. The purchaser, typically an institutional investor, assumes ownership of the policy, pays its premiums, and eventually collects the death benefit upon the insured's passing.
Key Aspects of Life Settlements:
- Sellers receive a cash payment exceeding the policy's surrender value but less than its death benefit.
- Purchasers become beneficiaries and undertake premium payments.
- Common reasons for opting for life settlements include retirement, unaffordable premiums, and unforeseen emergencies.
Delving into the Mechanics of Life Settlements
Transaction Process: When policyholders can no longer afford their insurance policies, they can sell them to investors for a lump sum cash payment. This transfer of ownership entails the new owner assuming responsibility for premium payments and ultimately receiving the death benefit.
Seller Considerations: Life settlements are typically pursued by older individuals seeking to supplement retirement income. Other motives include financial constraints, policy redundancy, and unexpected financial emergencies.
Special Considerations and Legal Precedents
Legal Framework: Life settlements have evolved into a robust secondary market for life insurance policies. A landmark legal case, Grigsby v. Russell (1911), established the legality of policy transfers, likening life insurance to conventional property with transferable rights.
Life Settlements vs. Viatical Settlements: Understanding the Distinction
Viatical Settlements: Originating in the 1980s, viatical settlements catered to individuals with terminal illnesses, allowing them to sell their policies for cash. Unlike life settlements, viatical settlements involve higher risks for investors due to uncertainties surrounding the insured's life expectancy.