When you sell an existing life insurance policy to a third party for cash in return, you call it a life settlement. Life settlements can get you more cash than the cash surrender value of the policy. However, the value is still less than the net death benefit. People choose to work through the process of life settlement transaction either with the help of a life settlement company or a broker. While most life settlement companies are buyers as well, brokers work as mediators for the seller and buyer.
Each year, the premium rates keep increasing. As the policy ages, you would have to pay a lot more for premiums. Premiums, at a certain point of time, may become hard to afford. This is one of the most common reasons why people sell their policies for settlement options life insurance. While many people know about life settlements, many people don’t conduct proper research about the types of life settlements that may be available. There are basically three types of life settlements, as mentioned below.
TRADITIONAL LIFE SETTLEMENTS
When we talk about a life settlement, we automatically talk about a traditional life settlement. This makes it clear that traditional life settlements are the most common kind. A traditional life settlement involves the policyholder selling his policy to a buyer (generally, a life settlement company) for cash in exchange. The value of the life insurance policy depends on various factors, like policy value, the age of the policyholder, type of policy, etc.
Once the policyholder sells the policy, the buyer has to pay the premiums for the life insurance policy until the seller dies. Once the seller of the policy dies, the buyer gets the death benefit. A traditional life settlement involves a complete transfer of ownership from one person to another. Moreover, when the ownership is transferred, the buyer has to pay all the money for the policy to the seller.
RETAINED DEATH BENEFIT
In a retained death benefit, a policyholder would sell his policy to a licensed life settlement company. However, the seller or policyholder does not get any cash in exchange soon after selling the policy. Instead of compensating in cash, the life settlement company that buys the policy takes care of the premiums. Now, once the insured dies, the life settlement company would give a part of the cash from the death benefit to the beneficiary of the insured.
Since the buyer takes care of the premiums, he would only pay a part of the death benefit to the beneficiary. However, the amount that the beneficiary gets is generally a lot more than what the insured receives in the case of a traditional life settlement. While it’s important to check if or not the life settlement company you’re selling your policy to is licensed, it becomes even more important in case of retained death benefits. This is because the seller does not receive instant cash upon selling his policy.
Furthermore, a retained death benefit is a good alternative for people who find it hard to keep up with the increasing costs of premiums. So, instead of completely selling the policy for a certain price, the policyholder can have the company pay for premiums while the beneficiary still gets to reap a good part of the death benefit.
HYBRID LIFE SETTLEMENTS
As the name suggests, a hybrid life settlement is an amalgamation of both kinds of settlement options life insurance, that is, traditional and retained death benefit. Let’s take an example to understand hybrid life settlements better. Imagine there is a situation where you need a certain amount of money. However, you also need to make sure that the beneficiary gets the death benefit when you pass away too.
A hybrid life settlement would allow you to sell your life insurance policy and get some money instantly. The life settlement company would take care of the premiums and later on, give a part of the death benefit to the beneficiary when you pass away. That way, you can take care of your financial situation without completely compromising on the death benefit your beneficiary is supposed to get.
It’s important to know about the kind of settlement options life insurance before you think of getting a life settlement. Each one differs in its purpose; thus, you need to know what you actually want out of your life settlement transaction. Once you sort that out, working with a life settlement company becomes easier.