Life Settlements: A Strategic Option for Retirement Income

When planning for retirement, one of the most overlooked financial opportunities is a life settlement. As retirees seek ways to maximize their income and minimize risk, selling a life insurance policy through a life settlement can be a powerful tool—especially for those with policies they no longer need or can’t afford to maintain. In this article, we’ll explain what life settlements are, how they work, their pros and cons, and how they can be used to support a secure retirement.

What Is a Life Settlement?

A life settlement is the sale of an existing life insurance policy to a third-party investor for a cash payment. The payment is typically more than the policy’s cash surrender value but less than its face (death benefit) value.

After the sale, the buyer becomes the new owner and beneficiary of the policy. They take over premium payments and receive the death benefit when the original policyholder passes away.

Life settlements are generally available to seniors age 65 and older who own a life insurance policy with a face value of $100,000 or more. Policies may include universal life, whole life, variable life, or even term life (if it’s convertible).

How Life Settlements Work

The life settlement process involves several steps:

1. 1. Policy Evaluation: A licensed life settlement provider evaluates the policyholder’s age, health status, and the details of the life insurance policy. Policies of individuals with shorter life expectancies tend to fetch higher offers.
   2. Market Bidding: Once deemed eligible, the policy is presented to a marketplace or buyers who make offers based on projected investment returns.
   3. Sale and Transfer: If the policyholder accepts an offer, legal ownership of the policy is transferred to the buyer. The seller receives a lump-sum payment, and the buyer continues paying premiums until the policy matures.
   4. Payout: Upon the insured’s passing, the buyer collects the death benefit.

This process is regulated at the state level, and most states require life settlement companies to be licensed.

Why Consider a Life Settlement?

Life insurance is typically purchased to protect loved ones financially in case of an untimely death. But circumstances change. Perhaps your children are financially independent, your spouse has passed away, or you’re dealing with rising healthcare costs in retirement.

Rather than letting a policy lapse or surrendering it for a minimal amount, a life settlement allows you to unlock the value of your policy. That money can then be used for a wide range of needs:

• Covering long-term care expenses
• Paying off debt
• Funding lifestyle needs in retirement
• Investing in income-generating assets
• Enhancing cash flow for emergencies or travel

Pros of Life Settlements

Here are some of the primary benefits of pursuing a life settlement:

• Unlock Hidden Value
  Many policyholders don’t realize their life insurance policy is a financial asset that can be sold. A life settlement often results in significantly more cash than surrendering the policy.
• No More Premium Payments
  Once the policy is sold, you are no longer responsible for paying premiums, which can free up monthly income—especially helpful on a fixed retirement budget.
• Flexible Use of Funds
  The proceeds from a life settlement can be used however you wish, whether for healthcare, housing, investments, or family support.
• Retirement Income Boost
  For retirees without sufficient pension income or those concerned about outliving their savings, a life settlement can offer a non-traditional source of liquidity.

Cons of Life Settlements

While life settlements can be beneficial, they’re not right for everyone. Consider the drawbacks:

• Reduced Estate Value
  Selling your policy means your beneficiaries will no longer receive the death benefit. If leaving a legacy is a top priority, this could be a major drawback.
• Tax Implications
  A portion of your life settlement proceeds may be taxable as income or capital gains. Consulting with a financial advisor or tax professional is critical.
• Privacy Considerations
  You’ll need to share medical and personal information with potential buyers, which some may find uncomfortable.
• Not All Policies Qualify
  Policies with small face values or on younger, healthier individuals are less likely to qualify or receive attractive offers.

Who Should Consider a Life Settlement?

A life settlement might be a good fit for:

• Seniors over 65 with a policy they no longer need
• Individuals with changing financial needs in retirement
• Retirees facing increased medical or long-term care expenses
• People considering lapsing or surrendering their policy

It’s especially worth considering if you’re cash-strapped or underinsured for other risks, such as long-term care, or simply want more financial freedom in your golden years.

Life Settlements vs. Viatical Settlements

Though similar, a viatical settlement is different in that it applies to individuals who are terminally ill and have a life expectancy of less than two years. Life settlements are for those with longer life expectancies and are primarily used for financial planning in retirement.

Regulations and Consumer Protection

Life settlements are regulated in most states. These regulations aim to protect consumers through:

• Licensing requirements for life settlement providers
• Required disclosures about offers, fees, and alternatives
• Waiting periods after purchasing a new policy before it can be sold

When pursuing a life settlement, always work with a licensed provider or a financial professional who adheres to fiduciary standards.

How to Get Started

Here are steps to explore if a life settlement is right for you:

1. Review Your Policy: Find out the type, value, and current premiums of your policy.
2. Get a Life Expectancy Estimate: Your health status is a major factor in your policy’s market value.
3. Consult a Trusted Advisor: Work with someone who understands both retirement planning and the life settlement process.
4. Compare Offers: Just like selling a home, it’s wise to get multiple bids.
5. Evaluate the Trade-Offs: Consider how the loss of the death benefit fits into your estate and financial goals.

Final Thoughts

In an era where retirees are living longer and facing more complex financial needs, life settlements represent an innovative solution for those holding unwanted life insurance policies. They allow seniors to convert a dormant asset into much-needed retirement income.

If you’re thinking about lapsing or surrendering a policy, take a moment to explore whether a life settlement might provide more value. It could make the difference between a stressful retirement and a more confident, well-funded one.

Need Expert Guidance?

For personalized financial advice, connect with a professional today. Visit our “Find a Financial Professional” section to get started. If you prefer a personal referral for your first appointment, call us at 877.476.9723 or contact us here to schedule a meeting with a trusted and licensed independent financial professional.

🧑‍💼 Authored by Brent Meyer, founder and president of SafeMoney.com. With over 20 years of experience in retirement planning and annuities, Brent is dedicated to helping you secure your financial future. Discover more about his extensive expertise here.

Disclaimer:
This content is for informational purposes only and should not be considered financial, tax, or legal advice. Life settlements are regulated at the state level and may not be suitable for everyone. Consult with a licensed financial advisor, tax professional, or attorney before making any financial decisions. SafeMoney.com and its affiliates do not buy or sell life insurance policies.