When a 77-year-old Omaha man decided he no longer needed two life insurance policies with a combined value of $1.15 million, he could have let his policies lapse.
Another option was surrendering them, which would have netted him about $48,500. Instead, he chose a life settlement option, which gave him a $745,000 payout for his policies.
Omaha World-Herald’s recent article, “How an Omaha man turned his life insurance policy into a $745,000 payout,” explains that with a life settlement agreement, you sell your life insurance policy instead of surrendering it or letting it lapse.
The buyers of life settlements, sometimes called life settlement companies or life settlement providers, are typically institutions that either hold the policies to maturity or resell policies—or sell interests in multiple, bundled policies—to hedge funds or other investors. In exchange for your policy, the policyholder gets a lump sum payment.
Many companies work with clients who hold a variety of policies, including universal life, whole life, guaranteed universal life, and term policies. Many policyholders don’t know the value of their assets.
For the 77-year-old Omaha man, his life settlement company considered bids from institutional buyers for the policy. These buyers are large companies that rely on actuarial data to determine the seller’s life expectancy based on the medical records the seller provides.
Life expectancy and the cost of keeping the policy enforced for the life expectancy period determine the settlement amount.
The bidding process can be competitive. In the case of the $745,000 settlement, the first the company received on the policies was $300,000 less than the final amount accepted.
Policyholders shouldn’t be swayed by TV ads offering to buy life insurance policies because those ads are placed by single companies offering only one bid on a policy. Unless there are multiple bidders, the policy owner isn’t really participating in the life settlement process. Patience pays off.
Like the 77-year-old Omahan, some seniors elect to sell their life insurance policies because they no longer need them. In other instances, the settlement is used for long-term care.
Reference: Omaha World-Herald (July 19, 2023) “How an Omaha man turned his life insurance policy into a $745,000 payout”