Life Settlements and Eldercare: Selling a Policy to Pay for Care

Page Reviewed / Updated - Jan. 2014

Life Settlement Definition

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.  A life settlement differs slightly from the related viatical settlement in which the seller of the policy has a defined life expectancy, typically of less than 5 years.  Life settlements are also referred to as senior settlements.

Pros & Cons / Program Details

If an elderly person is fortunate enough to have a life insurance policy, then a life settlement is a good source of funds to pay for long term care when compared to accepting the cash surrender value (CSV).  The CSV 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.

Did You Know?
Life insurance policies can also traded for care services.  Doing so gets the policyholder a much higher value than would a life settlement.  Learn more.

The following situations make a policy more attractive to buyers and therefore generate higher purchase amounts during a life settlement.

  • 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.


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 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 or assisted living.

 Generating a lump sum of cash from a life settlement may change the financial status of a senior and disqualify them for Medicaid or Supplemental Social Security.

Qualifications for Life Settlements

Life insurance settlements require a buyer and each buyer of life settlements has their own qualifications.  The information below is typical but be aware that exceptions exist.

Individual Qualifications
  • The policyholder must be at least 65 years of age although most are closer to 75.
  • The life expectancy of the policyholder is usually less than 15 years.  Some buyers require the insured to have a medical exam; other will simply review the senior’s medical records.

Policy Qualifications
  • Not all types of life insurance are eligible, but the following types of policies usually are: Universal Life, Whole Life, Variable Universal Life, Term, Convertible Term and Second-to-Die.
  • Most life settlement companies require the policy to have been in place for 2 or more years.
  • Policies must have a minimum face value of $100,000.  It is worth noting that there is an alternative to life settlements for policies with a face value of at least $50,000.

Benefits of Life Settlements

Payments and Tax Consequences

Life settlements are paid out in a single lump sum and there are no restrictions on how a life settlement payment can be used.   The proceeds 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.

 Policy sellers should be aware the life settlements can be taxable and that receiving a lump sum of cash can disqualify them for Medicaid.

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.

Life Settlement Costs

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 charge fees and 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.
1.  Percentage (maybe 6%) of the policy’s face value
2.  Percentage (maybe 25%) of the life settlement amount
3.  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 using this model is working in their best interests.

Broker’s Fee Model

Face Value
of Policy

Cash Surrender Value

Life Settlement Amount

Broker’s
Fees
Structure

Broker’s
Fee Amount

Policy
Holder’s
Amount

1) % of Face Value

$500,000

$50,000

$150,000

6% of Face Value

$30,000

$120,000

2) % of Settlement Amount

$500,000

$50,000

$150,000

25% of Settlement

$37,500

$112,500

3) % of Settlement - CSV

$500,000

$50,000

$150,000

35% of Settlement minus the Cash Surrender Value

$35,000

$115,000

Application Process

What to Expect

Life settlements are usually paid out within 6-12 weeks after the insured or their broker begins the sales process.  Policyholders should be aware that they may be required to undergo a medical exam or they most certainly will have to share their medical records.  Waiting for doctors to provide medical information is usually the largest factor in delaying a life settlement process.

How to Apply

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 can 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, determine the life settlement value of a policy or be connected with a broker, please complete the form below.

 

First and Last Name(*)
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Age of the policyholder(*)
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Face value of the policy(*)
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