What Is A Life Insurance Settlement?

As time goes on, our life circumstances change and we find ourselves needing to re-evaluate various aspects of our lives, including our financial arrangements. When it comes to taking a long hard look at our insurance coverage, we may find that a life insurance settlement is a viable option.

In brief, a life insurance settlement is a situation in which the owner of a policy determines that it is his or her best interests to sell their policy to a third party. The third party provides payment in cash to the former owner of the policy, who no longer has any claim now or in the future against the policy. Under the terms of the life insurance settlement, the third party also becomes responsible for the payment of any premiums for the remaining life of the policy.

Life insurance settlements, like any life insurance policy situation, are regulated by the insurance departments of each state. The type of regulation in life insurance settlements varies from state to state. In some instances, the state may use the term of a viatical life insurance settlement to refer to cases where the sale of the policy involves a person who is terminally ill, or one who is advanced in years. Life insurance settlements that involve circumstances other than terminal illness or persons under the age of 65 may be referred to simply as "life insurance settlements." In other states, the same term may be used to refer to just about any type of life insurance settlement, regardless of the circumstances.

There are several reasons why someone might opt for a life insurance settlement. One of the most common reasons is to pay for outstanding healthcare costs. While the person may not be terminally ill, the amount left due after health insurance has covered its share may be enough to threaten overall financial stability. In this instance, the individual is choosing a life insurance settlement as a means of avoiding financial difficulties and may at some future point purchase another life insurance policy.

Another common reason is that financial conditions have changed and the owner can no longer afford the premium. Rather than allowing the policy to lapse, the owner will choose a life insurance settlement as a means for getting some value from the years of premiums paid into the policy. As with the previous example, the individual may choose to invest in a new policy once the financial outlook has improved.

A third reason to consider a life insurance settlement would be a drastic change in the overall finances of the individual; changes that are different enough to impact the estate planning needs of the individual. As an example, unexpected influxes of cash may create a situation where the very reasons for the original purchase of the policy may no longer apply. In that instance, the owner may no longer wish to pay premiums for coverage that is now redundant at best and choose the option of a life insurance settlement as a means of amending the overall fiscal profile to reflect the new financial structure.

Not all types of life insurance policies are eligible for a life insurance settlement. Typically there is no problem with obtaining a life insurance settlement with whole life, universal life and any type of term life policy that is convertible. The amount of money that can be realized from a life insurance settlement will vary. Final payout will be based on such factors as the medical condition and age of the owner of the policy, the kind of insurance held, the level of rating of the issuing insurance company, and the amount of the premiums. It is also important to realize that a life insurance settlement is not exempt from taxes in every state. Consultation with an accountant or other financial expert will help the individual to determine any taxes that may be due.

When your life circumstances change, it is a good idea to re-evaluate your life insurance and see if a life insurance settlement is in your best interests.