Types of Life Settlement Transactions
Just like selling your car or your home, there are several different ways you can sell your life insurance policy. In the life settlement market, investors looking to buy policies have a number of ways to purchase a policy based on what works best for the seller and the buyer. After examining your policy and reviewing your life expectancy assessment, a life settlement investor may present you with different life insurance settlement options.
Standard, All Cash Life Settlement
The most common type of life settlement transaction is the “all cash” option . This is a simple cash sale that involves the outright sale of the policy and all its benefits for single, all cash payment. An investor buys the policy as is, and the policyholder sells it for a single fixed sum. It is a one-time cash transaction that results in the transfer of ownership of your life insurance policy in exchange for a lump-sum cash payment to the seller. The seller has the option to spend the funds however they choose.
Retained Death Benefit (“RDB”) Life Settlement
An option growing in popularity in the life settlement industry is the retained death benefit life settlement. In this case, a policyholder may be interested in selling their policy, whether they no longer want to pay premiums or are in need of the funds. However they want their beneficiary to receive some portion of the policy proceeds when the insured dies. In a retained death benefit transaction, the investor buys the policy and agrees to share a portion of the death benefit of the policy with a beneficiary named by the seller. Thus, the seller retains a portion of the death benefit as all or a portion of the payment for the policy.
Retained death benefit transactions usually work best for policies that have marginal settlement value (i.e. the policy holder is too healthy or too young for the policy to have a significant value in a cash sale). This type of life settlement allows the policyholder to retain a portion of the death benefit and forgo future premium payments, while preserving some benefit for their beneficiaries.
Borrow/Lend Life Settlement
Life settlement investors who are buying a life insurance policy from someone who is terminally ill often offer the option to borrow the funds applied to the transaction, often for tax reasons. Because the term “terminal” is defined differently from state-to-state, taxes can significantly impact some life settlement transactions. To prevent terminally ill policyholders from facing large tax bills, life settlement investors will lend money to the seller and take a security interest in the death benefit as collateral for the loan. The borrowed money is generally not taxed as income and thus the seller may benefit from this type of life settlement, if they qualify. Investors do this for insureds with relatively short life expectancies, that are not short enough to be considered terminal by some state’s statutes.
Fixed Amount or Installment Life Settlement
Just as an investor would offer to borrow or lend to prevent or lessen tax burdens, an investor may propose to buy a life insurance policy in installments. By making smaller payments at calculated intervals, a policyholder can avoid paying large tax penalties when selling their policy over time (i.e., via installments).
The options a policyholder is presented by an investor are dependent upon the value of their policy and their life expectancy. ISC Services offers life underwriting and accurate, research-driven life expectancy assessments to help life settlement investors make better decisions and advise consumers.