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Definition: Life Settlement
Life settlement is the process of selling an existing life insurance of a person to a third party at a onetime payment in cash at a price that is higher than the cash surrender value of the insurance but lower than the net death benefit. After buying the insurance, the purchaser becomes the beneficiary of the policy and is then responsible for the payment of dividends. The purchasers are generally experienced institutional investors buying policies with a face value more than $250,000.
The following can be the reasons for selling one’s life insurance policy:
• The spouse of the policy holder may have been deceased and the children/heirs are self sufficient.
• The policy holder may be divorced with no heir whom they wish leave benefits to.
• The policy may be sold for generating funds for meeting long term care or healthcare costs.
• Any change in tax law or estate law may cause the policy holder to consider selling the policy.
• The policy may be sold by the policy holder to repay existing payment dues by cutting out on the payment of further payments.
• Any need of cash may force the policy holder to sell the policy. For example in case of buying a retirement home or for funding the education of grandchildren.
In a judgment in the US Supreme Court in a case of Grigsby vs. Russell in 1911 it was established that a life insurance policy is a private policy and is therefore transferable to any person without any limitations.
Advantages of life settlement:
• One can pursue a lifelong dream by selling a term insurance that is lapsing.
• It can help in generating income after retirement and also gives a relief from paying premiums.
• It can be used for generating funds required for long term care.
Disadvantages of life settlement:
• The heir loses the money that could be utilized by him/her.
• Life settlement may have an impact on government aided low income assistance.
• In case of high amount of debts by the policy holder, the amount generated by life settlement can be claimed by the creditors.
• Unlike life insurance, the amount generated by life settlement may be subjected to taxes.