How Do Life Settlement Investments Work?

Life settlement investments are when an investor purchases a life insurance policy. This is a mutually beneficial agreement under many different conditions.

Some of these conditions include:

  • A loss of financial dependents that would otherwise be beneficiaries to a life insurance claim
  • Financial hardships and difficulty making payments

Life settlement investments are often accomplished by an investor paying cash to the insurance policyholder for the rights to the policy, offering a higher quality of life to the seller, and an underutilized investment opportunity for the buyer.

This is usually done in a one-time cash purchase, a cash value that is less than the net death benefit but is more than the cash surrender value for the seller.

There are alternative options for sellers, including things like accelerated death benefits (which must meet specific qualifications), a loan from the cash surrender value, converting the policy to another type of insurance coverage, or donating the policy to charity.

But life insurance settlements are usually the preference for sellers due to the ease of the transaction and immediate release of bulk funds. It is the most direct method to convert a life insurance policy into a higher quality of life for the seller.

How Are Life Insurance Settlements Made?

Life insurance settlements can be made in many ways, most often involving a life settlement company that will offer pricing packages based on the variables of the seller and their policy. These variables span from age, health, pre-existing health conditions, and policy details.

In general, it’s a good idea to convert a term policy to permanent insurance as quickly as possible because terms are usually negotiated around age, but it’s also important because of age-based restrictions which set a range, typically somewhere around 70, when negotiation is no longer possible for a term policyholder.

It’s also a good idea to convert to permanent life insurance early because of its format for fixed rates, meaning your deal will not change over time.

But first, you’ll have to convert a life insurance policy into the right format for sale.

Term life insurance policies are an issue for a life insurance settlement because of their structure, which can end the policy entirely if pre-requisites are met, and are on a temporary time table. Instead, these policies will have to be converted into permanent life insurance policies, which become guarantees. These guarantees are important for investors, which means that converting term insurance policies is an important part of the process.

To convert a term life insurance policy to permanent life insurance, there are different options depending on the type of term life insurance policy one has.

With a convertible term life insurance policy, achieved with a convertible rider that is an option at the onset of an insurance policy, this process is made much easier as long as pre-requisite conditions are met (often depending on age and any time limitations for when a conversion can happen in a term policy).

If these conditions are met, converting a term policy into permanent insurance is a direct process that simply involves communication with a life insurance policyholder.

Convertible policies will also avoid any additional health inspections before receiving a permanent insurance policy This is a tool that can also be used for people who would otherwise decide to purchase another term policy, as this path can skip the additional health check.

For those without a convertible term life insurance policy, however, this process is a bit more extensive with a few extra steps and could be made impossible depending on the term policy. The most common reason a term policy is ineligible for conversion to permanent life insurance policies is an agreed-upon time window within the term policy or an age-based restriction.

If these conditions aren’t met, the term life insurance policy will not be eligible to become a permanent life insurance policy. If they are, there will then be a negotiation with the life insurance policyholder.

For those with term policies that are eligible for conversion to permanent life insurance, there’s also the option for partial conversion. This method will allow for a term policyholder to convert part of their policy into permanent insurance.

This is beneficial as a way to ensure some level of coverage even if a term policy ends, and also allows for manipulation of premiums that may become too much for a policyholder.

By initiating a partial conversion, a policyholder can manage premiums closely to reach the perfect balance of coverage and affordability.

About the Author:
Alex Erickson is the co-founder of Cedar Life Settlements, a life insurance settlement broker based in Charlotte, NC. A life settlement is a sale of your life insurance policy, or part of your policy, for a cash payout. Check our social channel Twitter, Facebook and LinkedIn.