A life insurance buyout is another term for a life settlement, which is fancy talk for the process of selling your life insurance to a third-party investor. It’s a simple transaction that gives your an upfront cash payout in exchange for the death benefit at a future date. This could be a good option if you have a life insurance policy which you no longer want, need or can afford. This article summarizes the important things you need to know about a life insurance buyout.
How the Buyout Works
Let’s say you no longer want your life insurance or would prefer to receive an upfront settlement instead of waiting for your beneficiaries to collect it when you pass away. You would pursue a life settlement. An institutional investor called a life settlement provider (often times it is a large fund that specializes in buying life insurance) would evaluate your policy and your health, and then decide whether or not to make you an offer for your life insurance policy. The average settlement offer can be around 20% of the death benefit – meaning if you have a $1,000,000 policy, the offer can be on average around $200,000.
If the offer is to your liking, the investor will escrow the settlement offer into an escrow account, to be released when the life insurance company transfers ownership of the policy to the investor. Once the ownership is transferred, you get the settlement offer. Then, you are no longer responsible for paying the annual premium cost (the payments you make to keep the policy in force) – the investor continues to pay the annual premiums. When the insured (you) eventually passes away, the investor keeps the policy death benefit – your beneficiaries don’t receive any of it. And voila, the buyout is complete. You can read more about how life settlements work here.
Reasons to Cash Out Your Policy
There are many reasons to consider this path. People often consider a life settlement when they hit one of the following points in life:
- Your needs have changed. You no longer need your life insurance. Maybe your kids are all grown up and financially stable and self sufficient. Or maybe the beneficiary was your spouse, but they passed away before yourself. Or maybe you’ve saved up an estate for your kids and they will no longer need the protection of the policy. Life insurance may be a nice-have but not always necessary.
- It’s expensive! You can no longer afford to keep making premium payments. Or you may rather spend that money on something else. Often times, seniors who encounter health obstacles like cancer use the proceeds of a life settlement to pay for their medical treatment.
- You would like a payout. Life settlements can provide a lot of money. Ovid has helped consumers obtain million-dollar payouts – an amount of money that can really change your life and quality of retirement. It may be economical to sell your life insurance and reinvest the proceeds into a different investment like stocks or bonds.
Want to know your policy value?
Use this Life Settlement Calculator to get an instant estimate of value. It only asks for a few factors like age, health and policy value but can get you started.
Are You Eligible for a Settlement?
Great, a big payout and no more premium costs. Sign me up! It sounds appealing to anyone, but do you qualify? Are you eligible for a buyout? Whether you qualify for this transaction depends on several factors. The most important of which are that you’re over 65 years old and have a $100,000 or larger life insurance policy.
Age: 65 years is the minimum age, but often too young to qualify for a life settlement. Most people become good candidates for this when they’re around 73 years old. The older you are, the more valuable your policy is to an investor. The exception to this rule is if you have a terminal condition. If you have a life expectancy of 4 years or less, it doesn’t matter what age you are: you’re probably a candidate for this transaction. A buyout of a terminally ill person is often referred to as a viatical settlement.
Policy Size: In today’s market environment, the minimum policy size is $100,000. This is because there are costs to the buyer to transact the policy. it’s pretty simple, so the larger your policy is, the more valuable it is to an investor.
Here is more detailed information on life settlement eligibility.
How is Your Offer Calculated?
A lot of math goes into a life insurance buyout offer. This includes variables like your age, health, family health history, policy type, policy size, insurance company, state and many other factors.
Basically with everything else equal, the older you are, the bigger the settlement offer. The less healthy you are, the bigger the settlement offer. The bigger the policy, the bigger the settlement offer. To generate your offer, a life settlement provider (institutional buyer) will run a life expectancy analysis based on your medical records and history. They will use that life expectancy to estimate the time and cost of holding the policy and then what they can afford to pay you in a settlement offer. If you’re unsatisfied with one offer that a buyer has provided you, it may be smart to go to a second buyer and see if you can get a competing offer.
You can learn more about how these different variables like age and health influence your offer here.
How Should You Proceed?
Understand all of your options. You may be entitled to any of these options:
Cash Surrender Value. Your life insurance may have a “cash surrender value” – meaning that it has value if you surrender it to the life insurance company. A life insurance buyout works when the settlement offer can afford to be higher than your cash surrender value. Ask your insurance agent about this option if you’re unsure.
Policy Loan. You may be eligible to borrow money from your life insurance policy, which is then generally deducted from the death benefit. The loan amount generally incurs a rate of interest which is also deducted from your death benefit. Ask your insurance agent about this option if you’re unsure.
Life Settlement. If after reading this article, you’re interested in pursuing a life settlement, you should estimate the value of your policy. You can just estimate yourself with this free life settlement calculator. You just answer a few questions and the calculator with calculate your offer value for you. If you have a financial advisor, you should ask them about this option.
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Ovid is a life settlement exchange. We instantly match you with institutional buyers who are interested in your policy, based on you and your policy profile. Getting an offer for your policy from Ovid buyer partners is completely free. If you do want so sell your policy, Ovid has proven to help obtain average payouts above the industry average. We’re based in San Francisco and have been featured in Forbes, US News, Business Insider for the incredible work we do for consumers. You can learn more about Ovid here.