Life Settlements and Eldercare: Selling a policy to pay for long term care
A life settlement is the sale, by the policyholder, of their life insurance to a 3rd party in exchange for a lump sum of cash. Sellers typically have a shortened life expectancy but are not terminally ill. The purchaser of the policy pays all future premiums and collects the death benefits upon maturity. Note this differs slightly from the related viatical settlement where the seller of the policy has a more defined life expectancy, typically less than 5 years.
If an elderly person is fortunate enough to have a life insurance policy, then a life settlement or a sale of the policy in exchange for cash is a good source of funds to pay for long term care.
Many life insurance policies have a cash surrender value. This is the amount of cash a policyholder receives from the life insurance company if they terminate the policy before it becomes payable. Life settlements are sales to other companies that can net the policy seller much more than the cash surrender value. The seller of the policy receives a lump sum cash payment which can be used for any purpose such as re-modeling a home to allow a senior to continue living there independently or to pay for in-home care, adult day care, assisted living or skilled nursing.
Most life settlements involve the use of a life settlement broker who shops the policy around to multiple buyers and charges a fee. It is possible for a seller to manage their own sale, but brokers often get a higher price for the policy than an individual seller and therefore can justify their fees.
The following situations make a policy more attractive to buyers and therefore generate higher purchase amounts.
- Greater age of the insured.
- Shorter life expectancy of insured.
- Lower cash surrender value as a percent of coverage amount.
- Lower annual premiums as a percent of coverage amount.
Note that life settlements are often confused with viatical settlements. The difference is the life expectancy of the policy holder. Shorter expectancies, under 5 years are considered viatical while longer expectations as much as 15 years are considered life settlements. Viatical settlements are intended individuals who have been diagnosed as terminally ill.
Be Aware That:
Generating a lump sum of cash with a life settlement may change the financial status of a senior and disqualify them for Medicaid or Supplemental Social Security.
Life Settlements are Also Known As:
-Senior life settlements
-Life Insurance Settlements
Qualifications for Life Settlements
Each buyer of life settlements has their own qualifications. The information below is typical but be aware that exceptions exist.
Life settlement sellers must be over 65 years old. Most sellers are closer to 75 years of age.
Disabilities / Health Requirements
To receive a life settlement, buyers typically require the insured to have a life expectancy of less than 15 years. Some companies require the insured to have a medical exam; other will simply review the senior’s medical records.
Marital or family status is not usually considered by the buyers when making a life settlement purchase decision though it is often a consideration to family members.
Financial Status Requirements
The financial status of the insured is not a factor in life settlement purchase decisions.
Veteran Status Requirements
The insured’s veteran status is not a factor in life settlement purchase decisions.
The geographic location of the insured is not a factor in life settlement purchase decisions.
-Most life settlement companies require the policy to have been in place for 2 or more years.
-Usually policies must have a minimum face value of $100,000. However there are organizations do life settlements with lower value life insurance policies.
-Not all types of life insurance are eligible, but usually the following types of policies are: Universal Life, Whole Life, Variable Universal Life, Term, Convertible Term and Second-to-Die.
Benefits of Life Settlements
Types of Benefit Payout
Life settlements are paid out in a single lump sum.
Restrictions on How Payout Can be Used
There are no restrictions on how a life settlement payment can be used. Policy sellers should be aware the life settlements can be taxable. Usually the life settlement amount minus the total premiums paid is considered as a capital gain or possibly as income. However if the proceeds of a life settlement are used to pay for the costs of long term care, tax deductions may apply.
Benefits Amounts & Limits
Life settlements do not have hard limits, but payouts are limited by the face value of the policy and a variety of other factors such as the age, life expectancy and cash surrender value of the policy. A life settlement may pay 2-3 times more than the cash surrender value.
Time to Receive Benefits
Life settlements are usually paid out within 6-12 weeks after the insured begins the sales process. Waiting for doctors to provide medical information is usually the largest factor in delaying the process.
This Source Can Help For
-Adult day care
-Assisted living / senior living
-Skilled nursing home care
-Alzheimer's / dementia care
Costs of Life Settlements Insurance companies do not charge a policyholder to sell their policy and receive a life settlement. However, many policy sellers will use the service of a broker to get the best possible payout for their policy. Brokers do provide a valuable service and their efforts can pay for themselves. That said, seniors should be selective if and when they choose a life settlement broker.
There are 3 models for broker’s fees. Brokers will take either:
- A percentage (maybe 6%) of the policy’s face value.
- A percentage (maybe 25%) of the life settlement amount
- A percentage (maybe 35%) of life settlement amount minus the cash surrender value.
The table below provides examples of each. It is important to note that the percentages can be negotiated so that the fees for each model are about the same, but the 3rd model most closely aligns the interest of the broker with that of the policy holder. Therefore a senior can be confident that the broker is working in their best interests.
Broker’s Fee Model
Cash Surrender Value
Life Settlement Amount
1) % of Face Value
6% of Face Value
2) % of Settlement Amount
25% of Settlement
3) % of Settlement - CSV
35% of Settlement minus the Cash Surrender Value
How to Apply for Life Settlements
The vast majority of people interested in life settlements use the service of a broker. Brokers provide 2 major advantages over attempting to sell a life insurance policy oneself. They manage what is a complicated process and they take the policy to multiple companies, get multiple, competing offers and therefore receive higher bids than individuals attempting to sell a policy themselves.
It is generally accepted that using a broker pays for itself, but there are always contrarian opinions. Without question, brokers make the process considerably easier and for that reason alone they are recommended. Initiating a conversation with a broker is highly informational, free of charge and puts an individual under no obligation. To learn more or be connected with a broker, complete the form below.
Page Reviewed / Updated - Mar. 2013