Life Settlement FAQs
What is a Life Settlement?
A life settlement is the sale of a life insurance policy (“the policy”) issued on the life of a person, who does not have a life-threatening illness or catastrophic condition that is likely to result in death within 24 months, for a dollar amount that is less than the policy’s face value. The person who is insured under the policy is called a life settlor. This person may or may not be the owner of the policy. Only the owner of the policy has the right to sell the policy. If you do not own the policy, the owner cannot sell the policy without your consent. The entity that buys the policy is called a life settlement provider. (“the provider”). A life settlement offers you the opportunity to receive a portion of your policy’s death benefit while you are still alive.
How does the Life Settlement process work?
You will be asked to complete an application and medical release forms so that your information can be gathered from your life insurance company and your doctors. All information gathered must be kept confidential and cannot be given to anyone without your written approval. If you qualify, the Life Settlement provider will make you an offer for your policy. The amount offered for your policy will be based on facts such as how long you are expected to live, the amount you pay for premiums, the rating of your insurance company, and your policy’s provisions.
Do I have to sell all of my policy?
No. You can sell all of your policy or you can sell only a part of your policy. If you sell only a part, you will be required to assign or transfer only the part being sold. If you sell the entire policy, the provider will become the new owner of the policy.
What if I change my mind?
If you change your mind after selling your policy, you can cancel the life settlement contract at any time up to the 15th day after your receive the money from the provider or thirty (30) days after the life settlement contract has been executed, whichever is less. To cancel the life settlement contract, you will have to return any money the provider paid to you for the purchase of your policy, along with any premiums the provider paid to keep the policy in force. If you change your mind, remember to arrange with the provider to have the insurance company transfer the ownership of the policy back to you.
What if I die shortly after selling my policy?
If you die at any time up to the 15th day after you receive the money from the provider, the settlement contract will automatically cancel. The provider will pay the owner of your policy or beneficiaries designated by the owner in the life settlement contract any proceeds it receives from your policy, minus any money it already paid to the insurance company to keep your policy current. The insurance company or the provider should refund any unearned premiums paid.
What other things should I know about a life settlement contract?
Some things that may be affected if you enter a life settlement are:
- There may be a loss of life insurance coverage to your spouse or other family members;
- The amount of premiums you pay;
- Policy cash values or dividends, if provided for in the policy;
- A loss of other rights or benefits, including conversion rights and waiver of premium benefits that may exist under your policy;
- You may incur tax consequences;
- Your ability to receive supplemental social security income, public assistance, and public medical services including Medicaid;
- The money you receive for your life settlement could be taken away from you by creditors, personal representatives, trustees in bankruptcy, and receivers in state or federal court.
Please note that IPS Advisors, Inc. is not offering legal or tax advice. Any discussion of taxes included in or related to this document is for general informational purposes only. Such discussion does not purport to be complete or to cover every situation. Current tax law is subject to interpretation and legislative changes. You should consult with your own independent legal and tax advisors.
