Are you having difficulty keeping up premium payments on a life insurance policy, or do you no longer need the policy? Policyholders once had only two options: let the policy lapse or turn it in for a meager cash surrender value. Now there’s another, often vastly more lucrative alternative: sell the policy to a company in an arrangement called a “life settlement.” A life settlement is the sale of a life insurance policy insuring the life of a senior citizen in return for a lump sum of cash.

Life settlement companies have sprung up only in the last several years. Such companies buy insurance policies — term, whole life, universal and other types — from seniors, pay the premiums, and collect the death benefit when the policyholder dies. Payments are usually significantly more than a policy’s trade-in value (but less than the death benefit, of course). To give one example, a policy with $1.25 million in coverage and a $190,000 cash surrender value was sold to a life settlement company for $415,000.

Life settlements are different from viatical settlements, in which a settlement provider purchases policies from policyholders who are terminally ill. Life settlement companies typically buy policies from people over age 65 who are not terminally ill, and who own a policy with a face value of at least $100,000 to $250,000, depending on the company.

Why do senior citizens sell their life insurance policies? There are many reasons, such as:

• The policy is no longer needed or wanted

• To pay for the rising cost of long-term healthcare

• The premiums become unaffordable

• There is a change of beneficiary due to death or divorce

• To receive more money than the cash surrender value

• There is a forced liquidation due to financial hardship or bankruptcy

• There is a change in estate planning needs

• The senior’s desire to live more comfortably in the later years of life

How much money a senior will get for his or her policy depends on a number factors, such as the owner’s life expectancy, age, medical condition, type of insurance policy being sold, insurance company rating and annual premium payments. Importantly, most types of life insurance policies can be sold. The most common types of life insurance policies include Universal Life, Whole Life, Term Life and Variable Life. In addition, most types of policies qualify for a life settlement if the owner is 65 years of age or older (however, a terminally or chronically ill person may qualify regardless of age), your life insurance policy is $100,000 or more in face value, and you have had the policy for at least two years.

There are some downsides to such transactions, however. Although the sales proceeds are generally tax-free up to the amount of premiums paid, some of the proceeds may be taxable. A tax professional should be consulted. In addition, the beneficiaries of your policy may not be pleased with the sale, which is why some life settlement companies require beneficiaries to sign off on the transaction.

Selling a policy may not necessarily be a good deal for the policyholder, depending on the circumstances. According to one estimate, there’s a 90 percent chance that a policyholder would do better financially by holding onto the policy than selling it. Still, the vast majority of life insurance policies either lapse or are surrendered before a death claim is paid. For those who can’t afford premiums or no longer need a policy, selling to a life settlement company can be a great option.

The sale of a policy generally takes approximately 30 – 45 days after receiving a completed application. Regardless of why you decide to sell the policy, the money is yours to spend, as you like.

The sale of a life insurance policy is regulated by most states and requires the involvement of a licensed broker. A broker is legally obligated to find the highest possible selling price for the policy owner, similar to a real estate agent selling a home. Donald D. Vanarelli, owner of this weblog, a New Jersey Licensed Insurance Producer Certified in Long Term Care, is licensed to assist clients in the sale of their life insurance policies through life settlements. For additional information, please call 908-232-7400 and ask for Ginny.