Once you sell your life insurance policy, there are some standard measures to expect. The timeline for the process may vary, yet the normal transaction takes 3 to 4 months, and some providers may expedite this process to as little as a couple of weeks.
The usual process of a life insurance settlement looks like the following:
Table of Contents
Application
To answer the question “How Do Life Settlements Work?”, the first step is filling out an application. The form might be filled out by hand, online, or a combination of the two. The application is going to ask for basic personal details, which include your health and age, in conjunction with questions concerning your life insurance policy.
Within the process of the application, you’ll be asked to sign a release form that allows access to your insurance policy illustration and medical records. The records are necessary to determine the amount of your cash payout.
Documentation
The settlement provider is going to use these release forms to collect your policy illustration and medical records. You might have to follow up with your insurance provider or doctor’s office to confirm that it’s alright to release those details.
Review
At this time, there are sufficient details to find the value of the life insurance policy. The life settlement company will determine if they want to buy the policy and what they’re willing to pay. It’s possible that within the process of review, the settlement provider is going to determine that it does not make sense to buy the policy.
Offer
A life settlement provider is going to communicate the offer of the payout either straight to you or your advisor. The offer might be negotiable, and you always can walk away from the transaction if unsatisfied.
Closing package
The precise closing package’s contents differ by state. The process may be tedious and might require different signing participants. Some of the most typical documents in the closing package involve a change of beneficiary form, change of ownership form, life expectancy reports, life settlement contract, and letter of competency.
Funds Transfer
When the insurance provider has checked the change of ownership, all payout funds get transferred to the policy owner. Funds may be released through a check or one direct deposit, or through a series of payments over an agreed period.
Valuation of the Life Insurance Policy
While calculating the amount of a payout, a life settlement provider tries to figure out how much they’ll pay into the policy until they obtain the death benefit. They want to ensure that their investment is well worth it.
The most important factors life settlement providers look into while figuring out the policy’s value are:
- Face value amount of policy
- Cost of keeping the policy in force
- Life expectancy
During the application process, the insured will sign HIPAA healthcare release forms. They’re used during the process of medical underwriting to figure out the life expectancy of the seller. Life expectancy is important for estimating the in-force illustration of the policy.
In-force illustrations are details from the insurance company regarding what it’ll cost to keep a policy active moving ahead. The policyholder has to give a provider permission to receive these details.
The last part of the process of valuation compares the amount of the death benefit to the projected expenses of keeping a policy active. It’s calculated easily by looking at the life expectancy of the seller and the in-force illustration.
Then, the life insurance company uses advanced mathematical models that calculate what price they’re willing to pay for a policy to gain a fair return on their investment.
It is morbid to consider, but providers of life settlements only profit when the policy seller dies. For that reason, a policy is more valuable if a seller has a shorter life span.
How is Life Expectancy Calculated?
As we already mentioned when discussing how life settlements work, when figuring out the value of a policy, the life settlement company looks closely into life expectancy.
Basic calculators for life expectancy, like this one here by the Social Security Administration, just look at sex and age. The models utilized by a life settlement company are more advanced.
Both your insurance agency and the life settlement companies use medical underwriting and actuarial tables while calculating a person’s life expectancy.
An actuarial table is utilized to estimate life expectancies based upon averages in population. Data points may include gender, age, stress-inducing debt, smoking habits, and additional lifestyle choices.
Medical underwriting evaluates the outlook of your future health based upon your medical records and a variety of statistics that determine the price of your premiums.
Blending your health evaluation with the actuarial table may offer a reasonably accurate estimate of the length of time that you’ll live.
This whole process once took weeks, yet new methods of determining life expectancy are now emerging. Now that Medicare data, medical records, and insurance claim information is being electronically entered, you can use that information to quickly determine the life expectancy with the use of computer simulations.
Selling Your Policy
After figuring out how life settlements work, step one is selling the life insurance policy and contacting a prospective buyer. You either can directly contact a life settlement provider, or you might work with a broker who can connect you to various buyers.
You can always contact an insurance agent to check if they have any relationships with purchasers. Life settlement brokers and insurance agents have a duty to only work on your behalf. Life settlement brokers aren’t the same as life settlement buyers. Brokers represent you during the transaction.
Brokers and agents are not free. They both get commissions and fees for their services, which combined may be as high as 30 percent of your last settlement payout. It’s possible to choose to sell the policy on your own to the life settlement provider. However, the process of dealing with the complex parts of the process of settlement on your own might not be worth the money you’d save.
Contact an expert who can guide you through this process. They will make it easier by providing you an estimate of the policy’s worth then match you with a policy buyer.
