What Is A Life Settlement?

Thinking about canceling a permanent life insurance policy for the cash surrender value? Before doing so, look into life settlements.

With a life settlement, you sell your life insurance policy to an unrelated third party for a discount of the death benefit. The third party then retains the policy, pays the premiums, and receives the insurance proceeds after death. This is similar to a viatical settlement, which involves selling life insurance policies of terminally ill individuals to a third party.

First, you need to make sure you no longer want the insurance policy. Even if you purchased the life insurance for a need that has passed, there may be other uses for the policy proceeds.

To qualify for a life settlement, the following conditions must typically be met:

• The policy must be beyond the contestability period.
• The death benefit must be at least $250,000.
• The insured must be at least 65 years old and have experienced a health change resulting in a life expectancy of 12 years or less.

In those circumstances, it is often possible to sell the insurance policy to a third party for substantially more than the policy's cash value. The transaction can take anywhere from 90 to 180 days.

Unlike a viatical settlement, where the proceeds from the sale are received by the insured free of income taxes, a life settlement may be subject to taxes. Proceeds up to the amount invested in the policy (i.e., premiums less any dividends or loans received by the owner) are tax free. Money in excess of that amount is taxable at either ordinary or capital gains tax rates, depending on the specific situation.