Understanding Life Settlements: Selling Your Life Insurance Policy

life settlement is the sale of a life

insurance policy to a third party. The

owner of a life insurance policy sells it for

a cash payment that is less than the full

amount of the death beneﬁt. The buyer

becomes the new owner and/or beneﬁciary of the

life insurance policy, pays all future premiums and

collects the full amount of the death beneﬁt when

the insured dies.

People decide to sell their life insurance policies for

many reasons. When an individual with a terminal or

chronic illness sells his or her life insurance policy,

that is known as a viatical settlement. When an

individual who does not have a terminal or chronic

illness sells a policy for other reasons, including

changed needs of dependents, wanting to reduce

premiums, and cash for meeting expenses, that is

known as a life settlement.

A life settlement may or may not be the right

choice for you. Your state insurance department,

along with the National Association of Insurance

Commissioners, is concerned that many consumers

may not fully understand life settlements. Please

continue reading before making any decisions.

Selling Your Life Insurance Policy

Understanding Life Settlements

Get All of the Facts

Before you enter into any life settlement transaction,

you should:

• Contact your life insurer to learn about all of your

possible options under your policy.

• Contact a life settlement broker or life settlement

provider for information about life settlements.

• Consult with your own ﬁnancial advisor who knows

your personal ﬁnancial needs. Be sure to ask about

tax and other ﬁnancial consequences if you sell your

policy.

• Contact your state insurance department for infor-

mation about current laws that may protect you.

Consider All Your Options

• Find out if you have any cash value in your life insur-

ance policy. You may be able to use some of the

cash value to meet your immediate needs and keep

your policy in force for your beneﬁciaries without

having to sell it to a third party. You may also be able

to use the cash value as security for a loan from a

ﬁnancial institution.

• Review other sources of cash that may meet your

ﬁnancial needs at a lower cost than a life settlement.

Other Considerations

• Contact a professional tax advisor. Find out the tax

implications. Proceeds are only tax-free under cer-

tain circumstances.

• Know that your creditors could claim the proceeds.

• Find out if you’ll lose any public assistance beneﬁts

such as food stamps or Medicaid if you get a cash

settlement.

• Know that you must provide certain medical and

personal information to third parties who will be

paid the proceeds from your policy upon your

death. These third parties may sell your policy and

pass along your medical and personal information

to other individuals.

Consumer Tips

• Understand how the process works and when the

different phases will happen.

• Decide whether to sell your policy directly to a life

settlement provider or go through a life settlement

broker who will do the comparison shopping for

you.

• If you don’t use a life settlement broker, compari-

son shop on your own.

• You don’t have to accept any life settlement offer.

• Check all application forms for accuracy, especially

information about your medical history.

• You must be truthful in your answers to application

questions.

• Make sure the life settlement provider agrees to

put your settlement proceeds in escrow with an

independent party or ﬁnancial institution to make

sure your funds are safe during the transfer.

• Find out if you have the right to change your mind

about the life settlement offer after you get the pro-

ceeds. In many states, you have the right to change

your mind for a certain period of time. If you have

that right, you’ll have to return the money you were

paid and premiums the buyer paid.

• Understand whether buyers may learn your iden-

tity when they buy your policy, and whether they

will know certain medical and personal infor-

mation about you, such as your address and life

expectancy.

Deﬁning the Terms

A life settlement is the sale of a life insurance policy

to another person or company in return for a cash pay-

ment of less than the full amount of the death beneﬁt.

A life settlement provider is the person or company

that becomes the new policy owner in return for a pay-

ment made to the seller. The life settlement provider

becomes the policy owner, must pay any premiums that

are due, and eventually collects the full amount of the

death beneﬁt from the insurance company.

A life settlement broker is the person or company who

represents the seller of the policy and can comparison

shop for life settlement offers. The buyer pays the bro-

ker a commission if the sale is completed.

Additional Questions to Consider

• Do I still need life insurance protection?

• Will I qualify for a new life insurance policy in

the future?

• If I sell my policy, how will they decide how much

cash I get?

• If I sell my policy, will there be any costs I have

to pay?

• If I sell my policy, will the money be put into an

escrow account? If so, who will the escrow agent be?

Does state law require the agent

to be licensed?

• Is my policy an employer or other group policy? If

so, do I need their permission to sell it?

• If I sell my policy, who will be the legal owner?

• Is the viatical settlement provider I plan to sell to

allowed to do business in my state?

• After I sell my policy, can the buyer resell it?

Consumer Alert

• If you’re asked to invest in or buy a life settle-

ment, contact your state insurance department

to learn more about the issues and risks.

• If you don’t have a life-threatening illness and

you’re interested in selling your life insurance

policy, contact your state insurance depart-

ment for more information.

• If you’ve been contacted by someone who wants

you to buy a policy and then sell it immediately,

contact your state insurance department. This activ-

ity may be considered fraudulent and the parties

may be prosecuted by the appropriate authorities.

Check with Your State

Your state insurance department may regulate the pur-

chase of life settlements. Contact them for a copy of

those regulations.

This publication was issued in joint cooperation with the:

National Association of Insurance Commissioners

2301 McGee Street, Suite 800 | Kansas City, MO 64108

(816) 842-3600 | http://www.naic.org