Life Settlement
The sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its death benefit. The buyer becomes the new beneficiary, pays future premiums, and collects the full death benefit when the original insured dies.
Example
“Unable to afford the premiums on his $500,000 policy, 78-year-old Frank sold it through a life settlement for $125,000 rather than letting it lapse.”
Memory Tip
Life Settlement = 'Settle for Less than Life' - you settle for less money now instead of waiting for the full death benefit later.
Why It Matters
Life settlements provide seniors with immediate cash from unwanted life insurance policies, offering more money than surrendering to the insurance company. This can fund medical care, retirement expenses, or other financial needs when maintaining life insurance is no longer practical.
Common Misconception
Many people believe life settlements are only for terminally ill individuals, but they're available to healthy seniors too. Also, some think the original insured continues paying premiums, when actually the buyer takes over all premium payments after the sale.
In Practice
George, age 75, owns a $750,000 whole life policy with $45,000 cash surrender value but can no longer afford the $8,000 annual premiums. A life settlement company offers him $135,000 for the policy - nearly three times the surrender value. The buyer will pay all future premiums and receive the $750,000 death benefit when George dies. Based on his life expectancy of 10 years, the buyer expects to pay approximately $80,000 in premiums plus the $135,000 purchase price, potentially earning $535,000 profit.
Etymology
From 'settle' meaning to resolve or conclude a matter, combined with 'life' insurance. This secondary market for life insurance policies emerged in the 1980s, initially serving terminally ill patients needing immediate funds.
Common Misspellings
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