What Is A Life Settlement And Why It Is Important To Have One

However, they aren't always a great idea. Knowing what it is and how it works provides much-needed options for certain groups of people.

Like many other legal matters, life settlements are difficult to understand at a glance. Yet, they are easy to understand with a little bit of help. Having a good idea of what they are and how they work empowers people in difficult situations.

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Life Settlements Offer Flexibility

This is how it works. People that have been paying into a life insurance policy for a long time are the ones that may be eligible for a settlement. A policy may be surrendered after several years for cash. It won't be anything close to the payout that beneficiaries would receive upon the passing of the covered individual. 

A life insurance policy has a cash surrender value that is representative of the premiums paid by the policy owner and the accrued interest over the lifetime of the policy. However, with penalties and fees, it will be significantly lower. 

The pros behind qcapital.com/learning/eligible-states/ explain that s life settlement is when you sell your policy to a third party for cash. The settlement company will pay the policyholder more than the cash surrender value but less than the final payout. The company will then continue to pay the premiums to keep the policy in effect. The life settlement company sees the return on their investment when the individual named on the policy passes away and receives the payout.

The policyholder surrenders their policy for more than the cash surrender value offered by the insurance company but sacrifices the payout upon the passing of the individual.

This is a third option that allows the policyholder to get more out of the premiums they've been investing in than previously before. However, this kind of service isn't available everywhere. You need to find a comprehensive state-by-state map detailing the availability of life settlements. Life settlements are also restricted to seniors and people with terminal illnesses.    

The Best Possible Alternative To A Lapsed Policy

In the case of financial hardship, a life insurance policy may need to be let go and allowed to lapse with no option to pay. Insurances are often the first thing to go. Seniors and sufferers of term illnesses are often without adequate funds due to the dwindling value of their pensions or the exorbitant medical costs that must be endured. Often people in this unfortunate situation can no longer afford to pay.

There may be additional clauses and policy issues that prevent the holder to receive their cash surrender value. In these instances, choosing a settlement is the best option for the policyholder. 

This option provides the opportunity to get a return on the premiums where there would otherwise be only a complete loss. In the event of a hardship that causes such a lapse in payment, a payout would be much appreciated, needed, and deserved.  

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A Life Settlement Is An Emergency Option

While a life insurance policy already has a minimal cash surrender value after a few years, life settlements are only available for people that are ending the end of their lives. That's because the settlement companies will continue to pay the premiums and they will lose their investment as time goes by without a payout. 

For people nearing the end of their life, a life settlement provides an emergency option to get some much-needed income to deal with pressing issues or emergencies. This shouldn't be taken lightly though. Accepting a settlement at this stage means that the beneficiaries get nothing. It may not be worth taking a settlement if the value is much lower than the payout and the covered individual is running out of time. In this event, other sources of emergency funding should be considered first. You may even be able to borrow on the value of the payout with a family member or friend.  

Knowing How To Use Life Settlements Empowers Regular People

As detailed in the article above, life settlements provide flexibility and choices for people that may be in dire need of help. The options they provide offer a way out of some very difficult situations. However, they can also be used for the wrong reason with negative consequences that the purchaser will soon regret. 

Life settlements are a tool available for our use but we must understand how to use the tool or we're likely to hurt ourselves with it. Read into and rely on some professionals that you can trust to ensure a good outcome if you're considering a life settlement on your life insurance policy.  

Samuel Daniel

Update 18 January 2021