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Life Settlement Guide

A life settlement is a financial transaction in which a senior citizen possessing an unneeded or unwanted life insurance policy sells the policy to a third party, as opposed to surrendering it back to the life insurance company. The seller receives immediate cash for the policy from the purchaser. The entity purchasing their policy becomes the new beneficiary of the policy at maturation and is responsible for all premium payments from the time of the purchase until the seller passes away.

Generally speaking, many policy owners who are the sellers in life settlement transactions are unfamiliar with this option until a financial professional mentions the option to them. This particular type of transaction has not yet become a mainstream financial product like stock and bond transactions, though in the past few years the positive industry growth and attention from high-profile proponents such as Warren Buffett, former U.S. Representative Bill Gradison, and The Wall Street Journal has created much interest in the industry.

A recent overview of the life settlements market can be found in the 2005 Industry Outlook compiled by major industry firm Maple Life Financial. A survey found on page 4 of this publication found that almost half of all responding advisors had senior clients who had surrendered a life insurance policy for the cash surrender value (in the case of a term life policy, the surrender value is $0) when many of these clients could potentially have qualified for a life settlement. Many are beginning to speculate that offering life settlements should fall under the fiduciary duty of a financial advisor.

How Life Settlement Works

In a life settlement transaction, there is a chain leading from the seller of the policy to the end buyer of the policy (known as a life settlement provider.) Each link in the chain has a different responsibility in facilitating the transaction and ensuring that it runs smoothly, while outside vendors typically assist the provider with specialized functions.

Policy Sellers

Senior citizens selling their policy generally are over 55 years of age, have a calculated life expectancy of between two and twelve years, and have experienced a health change that usually cause their insurance premium payments to rise. This undesirable scenario, often coupled with increasing health care and/or nursing home care costs, makes a life settlement an attractive option to many seniors. There are certain restrictions for their policies as well - policies must be valued at $100,000 or more, and must be either universal life, whole life, or convertible term contracts.

Financial Advisors

Senior clients often discuss life settlement transactions with their financial advisors instead of conducting the transaction on their own, since their advisors are usually much more familiar with this non-mainstream financial product. Some examples of advisors that are becoming increasingly involved in the life settlement arena are:

  • Accountants/CPAs
  • Attorneys (especially Elder Law Attorneys)
  • Financial Planners/CFPs/ChFCs/CFCs
  • Estate Planners/CEPs
  • Certified Senior Advisors/CSAs
  • Charitable Trust Officers

The decision to work with a broker is up to the client, since financial advisors can submit the client's case to the life settlement provider directly. However, in an industry where market value for life insurance policies is not common knowledge, brokers typically do the best job of obtaining fair market value for a senior citizens policy. By submitting life settlement cases to multiple providers, they are able to obtain a greater number of bids overall, and help facilitate negotiations between high bidders.


Life settlement providers are responsible for paying the client a cash sum greater than the policy's cash surrender value. The top providers in the industry fund many transactions each year and hold the seller's policy as a confidential portfolio asset, and do not make it available to outside investors. They also have in-house compliance departments to carefully review transactions, give seminars to both financial professionals and senior citizens about life settlements, and most importantly, they are backed by institutional funds from a major bank.

Other Involved Parties
  • Underwriters - Provide life expectancy estimates on the insured for pricing purposes.
  • Funding Sources - Banks that provide institutionally funded firms with cash for payments.

Steps In A Transaction

  1. Senior citizen with financial needs consults with an advisor, decides to sell his or her policy.
  2. Client & advisor select a broker who works with institutional providers.
  3. Broker submits case (and client releases medical information) to various providers.
  4. If policy meets criteria for a life settlement, providers send offers to the broker.
  5. Client accepts their preferred offer.
  6. Client and advisor complete the provider's closing package, and return essential documents.
  7. Provider places cash payment in escrow and submits change of ownership forms to the insurance carrier.
  8. Paperwork is verified and funds are transferred to the policy seller.

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