Should Retirees Consider a Life Settlement?

by Gary Foreman

Should Retirees Consider a Life Settlement photo

Just what is a life settlement and how can it help you increase the value of your investment portfolio? Here’s what you should know before you put a value on your life insurance policy and sell it.

Could something called a life settlement help boost your retirement savings? Many retirees are considering a life settlement in an effort to supplement their investible assets.

And, no wonder. In 2022, the average Social Security benefit is $1,658 (source: cnbc.com). And  Social Security is an important income source for 70% of recent retirees. According to Secure Retirement Institute research, it makes up 37% of their total income on average.

To help us understand what life settlements are and how they work, we approached Ken Kelly. Mr. Kelly is CEO of Windsor Life Settlements.

Q. What is a life settlement?

Mr. Kelly: Just like any other asset, a life insurance policy can be sold by one party to another for cash. So very simply, a life settlement is a transaction in which a life insurance policy is sold by one party to another.

The purchasing party is an investor willing to pay the policy holder a lump sum to become the beneficiary of the policy, while assuming responsibility for paying future premiums.

As part of the purchase transaction, the investor assumes responsibility for paying all future premiums required to keep the policy enforce. When the insured passes away, the investor receives the death benefit.

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Q. Why would I want to sell my life insurance benefits?

Mr. Kelly: Life settlements allow policy holders to convert their costly policies into cash. People seek out life settlements for many reasons. A life settlement offers up front value on a policy that may no longer seem affordable. Many people will seek out a life settlement because they feel they can no longer pay the premiums on their life insurance policies.

A life settlement will offer policy holders a value many times in excess of the policy’s surrender value.

Other times, people are looking to increase the value of their investment portfolios and view their life insurance policies as assets to be used for maximum advantage. As the value of a life insurance policy changes, it may be more advantageous to sell the policy than let it mature. A life settlement (or senior settlement) allows policy holders the ability to maximize the value of their policy over the life of the investment.

It may be as simple as needing extra funds to pay for services like extended care or nursing home costs or to pay for the ever-increasing costs of prescription medications and/or medical equipment.

Q. How does a life settlement compare to a ‘surrender value’ on my policy?

Mr. Kelly: For the right policies, a life settlement can provide a monetary value far in excess of the surrender value.

Q. Are all types of life insurance policies eligible?

Mr. Kelly: The majority of policies that are transacted as life settlements are Universal Life policies. Convertible Term, Joint Survivor and Whole Life policies are also eligible for life settlement.

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Q. Is there a way to estimate what my policy might be worth?

Mr. Kelly: There is no set formula to estimate a policy’s value without having it evaluated for a life settlement. The factors that affect a policy’s value are age of the insured, size of the death benefit, annual premium, and current health status of the insured. For example, if we have two insureds who both have a $250,000 policy with comparable annual premiums, but one insured is perfectly healthy and the other insured has significant health impairments, the insured who has health impairments will receive a higher offer than the healthy insured. The perfectly healthy insured may not receive any offers at all for his policy.

Q. Who should not consider a life settlement?

Mr. Kelly: In the event an Insured is faced with a terminal diagnosis, it is best to determine whether the policy contains an “Accelerated Death Benefit” provision. Such a provision may allow an insured to receive a portion of the death benefit while living. This benefit is included in most Term policies and also some Universal Life policies. Check with your insurance carrier to be sure.

Could a life settlement work for you? You’ll need to consider it carefully and talk with someone who can put a value on your life insurance policy.

Reviewed April 2022

About the Author

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. You can read Gary's full bio here. Gary shares his philosophy of money here. Gary is available for audio, video or print interviews.

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Every Thursday we’ll send you articles and tips that will help you plan for and enjoy a comfortable retirement. Subscribers get a free copy of the After 50 Finances Pre-Retirement Checklist.

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