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Types of Life Insurance Policies Eligible for Life Settlements
by
JG Wentworth
•
October 3, 2024
•
5 min
Life settlements offer policyholders an opportunity to sell their life insurance policies in exchange for a lump sum that is higher than the surrender value but lower than the death benefit. Understanding which types of life insurance policies are eligible for a life settlement can help policyholders make informed decisions. In this article, we explore the common types of life insurance policies that can be sold through a life settlement.
What is a Life Settlement?
A life settlement is the sale of an existing life insurance policy to a third-party investor for more than the cash surrender value but less than the full death benefit. Typically, policyholders pursue life settlements when they no longer need or can afford the policy, or when they prefer to have immediate access to the funds. The investor assumes the responsibility for paying the premiums and will receive the death benefit upon the policyholder’s death.
Types of Life Insurance Policies Eligible for Life Settlements
Not every life insurance policy qualifies for a life settlement, but several common types do. Let’s break down the most common policy types eligible for life settlements:
1. Whole Life Insurance
Whole life insurance is one of the most common types of permanent life insurance and is often eligible for a life settlement. Whole life policies offer a guaranteed death benefit, fixed premiums, and a cash value that grows over time. These policies can be an attractive option for investors due to their stability and potential long-term payout.
2. Universal Life Insurance
Universal life insurance is another form of permanent life insurance that provides flexibility in premium payments and death benefit amounts. There are two types of universal life insurance:
- Guaranteed Universal Life (GUL): This type of policy guarantees a death benefit but does not accumulate much cash value, making it less valuable for life settlements compared to whole life policies.
- Variable Universal Life (VUL): VUL policies allow for cash value investments in various sub-accounts, similar to mutual funds. They offer higher growth potential, making them more attractive for life settlements.
3. Term Life Insurance
Term life insurance is typically ineligible for life settlements because it does not have a cash value component. However, in some cases, convertible term life policies may be eligible if the policyholder converts them into a permanent policy. Additionally, term policies nearing the end of the term with high death benefits may qualify if they are likely to be renewed or converted.
4. Survivorship Life Insurance (Second-to-Die)
Survivorship life insurance policies cover two individuals, usually spouses, and pay out after the second person dies. These policies are often eligible for life settlements, especially when the primary insured individual has passed, and the secondary individual wishes to sell the policy for immediate cash.
5. Group Life Insurance
Group life insurance, usually offered by employers, is not generally eligible for life settlements unless it is convertible to an individual permanent life insurance policy. Once converted, it can potentially qualify for a life settlement, depending on the policy’s structure and terms.
6. Variable Life Insurance
Variable life insurance policies offer both a death benefit and a cash value that is tied to various investment accounts. Due to the investment potential of these accounts, variable life policies can sometimes be more valuable in a life settlement than traditional permanent policies. However, the fluctuating value of these investments can also make them riskier for buyers.
Get Cash From Your Life Insurance Policy
Get Cash From Your Life Insurance Policy
Factors That Influence Life Settlement Eligibility
While the type of policy is a critical factor in determining eligibility for a life settlement, several other factors also play a role:
- Age of the Insured: Most life settlement buyers prefer policyholders aged 65 or older, as they are more likely to pass away within a shorter timeframe.
- Health Status: Individuals with declining health are more likely to qualify for a life settlement, as this shortens the investor’s waiting period for the death benefit payout.
- Policy Size: Larger policies, typically with a face value of at least $100,000, are more attractive for life settlements.
- Premium Payments: Policies with lower premium costs relative to the death benefit are more desirable because investors will have to pay these premiums until the policyholder passes away.
Benefits of a Life Settlement
Life settlements provide an opportunity for policyholders to tap into their policy’s value without waiting for the death benefit. Some key benefits include:
- Access to immediate cash for medical bills, retirement, or other expenses.
- No need to continue paying premiums on a policy that is no longer needed.
- The ability to receive more than the policy’s surrender value.
Conclusion
If you no longer need your life insurance policy or can no longer afford it, a life settlement might be a viable option. Whole life, universal life, and other permanent policies are typically the most eligible, though some term and group life policies may qualify as well. Understanding your policy type and consulting with a life settlement professional can help you determine whether a life settlement is the best choice for your financial situation.
About the author
The information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
