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Understanding Life Settlements


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A life settlement is the sale of ownership of a life insurance policy to another outside third party. The proprietor of a life insurance policy receives monetary funds for the policy. The buyer turns into the new proprietor as well as the beneficiary of the policy, is responsible for payment of all future premiums due, and is the one to collect the death benefit in its entirety which the original insured party passes away.

Individuals come to the decision to sell their life insurance policies for a variety of reasons. Some typical reasons include: changed financial needs, changed needs of dependents, inability to afford premium payments, and needing cash for present expenses.

Life settlements should be entirely comprehended prior to selling a life insurance policy. Any potential policy owners considering a life settlement should contact their life insurance agent or company for further information, consult a trusted financial advisor who is familiar with the individual financial necessities, and get in touch with the state insurance department for any additional information about current insurance laws.

Life insurance policy holders should also find out if they have any cash value in their policy. If there is cash value, the policy holder might be able to use a portion of it to meet any immediate financial needs and still retain the policy for any beneficiaries. The cash value may also be utilized as a form of security to obtain a loan from an outside financial institution. It is also essential to consider any and all sources of cash that may potentially meet any financial necessities at a lower price than a life settlement.

A tax advisor will be able to help policy holders to understand the tax implications of a life settlement. Proceeds from these types of settlements are not tax-free and creditors can claim any proceeds. A cash settlement can also cause policy holders to be ineligible for public assistance they were previously eligible for. In addition, policy holders will have to provide personal medical information, which may be a concern. They buyer will be aware of this information, so it is crucial to find out beforehand exactly what information is required and who else might be the recipient of that information other than the buyer. This will be very different from providers advertising life insurance no medical exam policies.

There are important decisions a policy holder must make prior to making a life settlement such as whether they want to sell their life insurance policy directly to a provider or a broker who will perform comparison shopping for them. If a policy holder opts not to use a broker, they should make sure to do the comparison shopping on their own and to not settle for the very first offer.

When working with a provider, make sure the provider will agree to place the settlement proceeds in escrow with an independent financial institution to ensure that all funds are kept safe during the course of the transfer. It is a good idea to check with state laws to determine whether there is a grace period of time to reverse the life insurance sale in the event that a policy holder changes their mind. Obviously if this happened, any funds accrued would have to be returned in addition to any and all premiums the buyer paid.

Sarah Martin is a freelance marketing writer based out of San Diego, CA. She specializes in financial planning, investments, and life insurance. For a free quote, please visit


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