How Do Life Settlements Work?

The life settlement industry is a relatively new one and there are many people out there eyeing the market and looking to see how they can profit from it while it is still untested. The potential buyers target seniors who may be in financial straits or in poor health and prone to aggressive sales tactics and abuse.

Whoever buys your life insurance policy is actually acquiring a financial interest in your death. Not only does the buyer pay you a lump sum for your policy, he also undertakes to pay any additional premiums that might be required to support the cost of the policy for as long as you are alive. In exchange for this, the buyer will receive the death benefit from that policy when you die.

Life settlements have proven to be profitable not only for the investors that purchase policies, but also for the providers and brokers who handle these transactions. As a result, competition among life settlements providers for individuals who wish to sell or otherwise terminate their life insurance policies is becoming increasingly intense and purchase pressure is reaching new heights.

None of this means that you should never consider a life settlement. A life settlement might make sense for you if you no longer want your current policy, or if you can no longer afford the expense of paying insurance premiums and are willing to give up or replace the coverage. Even then, however, you should proceed with caution. Here are some of the key factors you should consider:

If you are considering buying a new policy with the proceeds of the life settlement, you will need to determine whether you will be able to get a new policy with equivalent coverage. What is this new policy going to cost? Will your old policy still remain in force and will this affect your ability to get additional coverage?

If you do manage to buy a new policy, you may have to pay higher premiums because of your age or changes in your health status. If your goal is to retain coverage but lower the premiums or obtain different benefits, you might want to consider options such as reducing your existing amount of policy coverage or making a "1035 Exchange". 1035 refers to a provision in the tax code which allows for the direct transfer of accumulated funds in a life insurance policy, endowment policy or annuity policy to another policy without creating a taxable event.

Before you do anything, speak to your insurance broker.