Can Life Insurance Be Sold?

The right to sell one’s life insurance policy was established by the United States Supreme Court in 1911, in the case of Grigsby v. Russell, which held that life insurance is an asset that can build up value and be sold just like stock or a house.  This right had little practical meaning before the advent of the secondary market for life insurance, because there was a monopsony market condition.  This means that there was only one buyer, namely the life insurance company that issued the policy, and this made it impossible for policyowners to receive fair market value.
top ⇑

What Is a Life Settlement?

A life settlement is the sale of a life insurance policy insuring the life of an individual who does not have a catastrophic, chronic or life threatening condition and who fits specific eligibility parameters. The amount paid in a life settlement is greater than the cash surrender value (if there is any) and less than the face amount of the policy. The entity that buys the policy is known as a life settlement provider. A life settlement broker arranges the sale of a policy and obtains the highest offer in the marketplace. The proceeds of a life settlement are unrestricted and can be used in any fashion. After the sale, the life settlement provider assumes all of the rights and obligations of the insurance policy.
top ⇑

Why Would Someone Sell a Life Insurance Policy?

A policyowner may want to consider a life settlement if surrendering or lapsing a policy is being contemplated, insurance needs have changed, beneficiaries have been outlived, premiums have become unaffordable, estate taxes are changing, cash is needed for other purposes, or the policyowner wants to fund new investments. Additional reasons are discussed in the Policyowners section of this website and are grouped by policyowner type.
top ⇑

Who Is Eligible for a Life Settlement?

The ideal candidate for a settlement is age 65 or older with:

• A life insurance policy with a face amount of at least $100,000
• A life expectancy of between 2 and 15 years

Depending upon market conditions, insureds who are younger and/or have longer life expectancies may also be eligible for a life settlement. The policy must be beyond the two-year contestability period. The owner of a policy can be an individual, business, trust, charitable organization, foundation or educational institution.
top ⇑

What Types of Life Insurance Can Be Sold?

Generally all types of insurance can be sold, including universal life, whole life, joint survivorship, and most term policies. Term insurance has no surrender value, so when a policyowner fails to pay the premiums necessary to keep a policy in force, the policy lapses and the policyowner receives nothing. Most term policies give policyowners the option to convert a policy to permanent insurance. This makes a term policy eligible for a life settlement and gives the policyowner the ability to tap into the hidden asset value of the policy. Individual and group policies are eligible for a life settlement.
top ⇑

What Determines the Amount of a Life Settlement?

There are a number of factors that affect a life settlement offer, including:

• The insured’s age
• The insured’s medical condition
• The insured’s life expectancy
• The policy type
• The amount of future premiums
• The policy’s cash surrender value
• The insurance company’s rating
• Any loans or liens on the policy

top ⇑

What Is the Process for Selling a Life Insurance Policy?

• The transaction begins when the policyowner and insured complete a life settlement application and sign authorizations to release medical and policy information.
• Brookwood Settlements then obtains a policy illustration from the life insurance company.
• Brookwood Settlements also obtains the insured’s medical records for the past five years and physicians’ statements.
• Brookwood Settlements sends these medical records to underwriters that calculate the insured’s life expectancy.
• Brookwood Settlements then submits all of this information to its network of life settlement providers and negotiates the highest offer.
• Once the policyowner accepts an offer, contract documents are issued and executed.
• When the contracts are fully executed, the life settlement provider escrows the settlement proceeds and submits change of owner and beneficiary forms to the life insurance company that issued the policy.
• As soon as the life settlement provider receives confirmation that the owner and beneficiary designations have been changed, the escrow agent delivers the settlement proceeds to the policyowner.

top ⇑

How Long Does a Life Settlement Transaction Take?

Generally, the process takes 8-12 weeks, depending on how long it takes the insured’s doctors to provide attending physician statements and copies of medical records. Certain life settlement providers offer a fast-track program for policies with a face amount of less than $1 million. In every case, Brookwood Settlements expedites every step of the process.
top ⇑

Is the Policyowner Still Responsible for Premiums After a Life Settlement?

No, the policyowner’s responsibilities end at the time of sale. After a life settlement, the life settlement provider assumes all of the rights and obligations of the insurance policy.
top ⇑

Are There Any Costs or Medical Exams?

No. There is no application fee or other expense associated with a life settlement, and there is no medical exam.
top ⇑

Is There a Difference Between a Broker and a Provider Representative?

Yes. Although both a broker and a provider representative will help a policyowner with the sale of a policy, there are important differences between them. A broker works for the policyowner. A broker will utilize a network of providers to find the best offer for the policy. A provider representative works for one provider. A provider representative will only check with the provider that he or she works for to get its offer. This will not result in the highest offer.
top ⇑

Is the Policyowner Responsible for Paying a Commission to the Broker?

No. The life settlement provider that purchases the policy is responsible for paying the broker’s commission, and the commission is not taken from the sale proceeds.
top ⇑

What if the Policyowner Wants to Cancel the Sale?

Most life settlement contracts can be cancelled for a period of time that varies by company. In many states, there are mandatory rescission rights, and these typically allow the seller to cancel the sale at any time up to the 15th day after receiving the money from the provider. To cancel the life settlement contract, the seller will have to return any money the provider paid for the purchase of the policy along with any premiums the provider paid to keep the policy in force.
top ⇑

What if the Insured Dies Shortly After a Policy Is Sold?

In most settlement contracts, if the insured dies shortly after the policyowner receives the money from the provider, the settlement contract is automatically cancelled. In many states, the life settlement provider must cancel the contract if the insured dies up to 15 days after receiving the money from the provider. The provider will pay the owner of the policy or beneficiaries designated in the policy any proceeds it receives from the policy, minus any money it already paid for the purchase of the policy and any premiums it paid to the insurance company to keep the policy current. The insurance company or the provider should refund any unearned premiums paid.
top ⇑

What Are the Tax Ramifications of a Life Settlement?

Brookwood Settlements does not provide legal, tax, accounting or financial advice, and policyowners are advised to consult with a tax advisor. In May 2009, the IRS published Revenue Ruling 2009-13 (PDF), which clarifies the tax treatment of a life settlement.

According to the Revenue Ruling, when a policy with cash surrender value is sold, the proceeds of the sale that exceed the adjusted basis in the policy are taxed as income. The adjusted basis is the total premiums paid less cost-of-insurance charges. The inside build-up under the policy as ordinary income. The rest of the income is treated as a long-term capital gain.

The Revenue Ruling states that in the case of a term policy (that has no cash surrender value), the proceeds of the sale in excess of the policyowner’s adjusted basis in the policy are taxed as a long-term capital gain. The adjusted basis, which is the total premiums paid less the cost of insurance protection, is generally zero. This is because the cost of insurance is deemed to equal the premiums paid.
top ⇑

Is the Process Confidential?

Yes. Brookwood Settlements takes extensive precautions to protect policyowners’ and insureds’ confidential information. Medical, financial and personal data will never be disclosed to or shared with third parties not involved in the sale of a life insurance policy without written consent, except when required by law or litigation. In order for us to provide arrange a sale, confidential information may be forwarded to licensed life settlement providers, who are committed to protecting privacy. These companies are required to keep all of our clients’ information strictly confidential.

Be assured that Brookwood Settlements never associates with providers who would use private money (from individuals rather than institutional investors) to purchase life insurance policies. This ensures that your policy becomes a part of a large portfolio of policies owned by a credible financial company, rather than a single policy owned by an individual. Only institutional capital offers maximum protection from privacy and fraud risks, and it’s the only kind of funding with which we work. Providers typically purchase hundreds of policies and package them in bundles for their institutional money manager clients. These sophisticated corporate investors are not concerned about the lifespan of any one particular insured. Instead, they are solely interested in the average life expectancy of an entire portfolio of policies, which is actuarially assessed based on the mortality rates of the general population.