What Is a Life Settlement?

Example 1 — The Premium Burden

A 74-year-old retired executive purchased a $1,000,000 universal life policy 20 years ago. His children are financially independent, his estate has been restructured, and the $14,000 annual premium has become a burden. The insurance company offers a cash surrender value of $82,000.

Through the secondary market, that same policy is submitted to 12 institutional buyers. After competitive bidding and negotiation, the client receives a life settlement offer of $310,000 — nearly four times the surrender value. He walks away with a meaningful lump sum, eliminates the premium burden, and uses the proceeds to fund long-term care planning.

Example 2 — The ILIT No Longer Needed

An estate attorney contacts Amrita Financial on behalf of a client whose irrevocable life insurance trust (ILIT) holds a $2,500,000 whole life policy. The original estate planning rationale for the trust has changed: the estate has shrunk below the federal exemption threshold, and the beneficiaries no longer need the death benefit for liquidity. The trustee has been paying $38,000 a year in premiums with no clear end purpose.

After a review of buyer appetite and policy terms, the trust receives a settlement offer of $740,000. The trustee distributes the proceeds to the trust beneficiaries, eliminating the ongoing premium obligation and delivering real, immediate value from an asset that had effectively become a liability.

Example 3 — The Advisor Who Caught It

A financial advisor conducting an annual review notices that a 69-year-old client holds a $500,000 guaranteed universal life policy with a level premium of $9,200 per year. The client's health has changed significantly since the policy was issued — a cardiac event three years ago has altered her health profile in ways that matter to institutional life settlement buyers.

The advisor refers the case to Amrita Financial. The policy is submitted to the secondary market and returns an offer of $195,000. The client accepts. She uses the proceeds to fully fund a long-term care insurance policy and eliminate the GUL premium. The advisor retains the client relationship, earns referral compensation, and is credited with a discovery the client never would have made on her own.

Life Settlement

• •Insured is typically age 65 or older
• •No terminal diagnosis required
• •Life expectancy generally 2–15 years
• •Settlement proceeds: typically 10–40% of face value
• •Most common type of secondary market transaction
• •Regulated in most U.S. states

Viatical Settlement

• •Insured has a terminal or chronic illness
• •Life expectancy typically under 24 months
• •Proceeds often tax-free under IRC §101(g)
• •Settlement proceeds: typically 50–80% of face value
• •Regulated separately from standard life settlements
• •Named after the Latin "viaticum" — provision for a journey

The U.S. Supreme Court establishes in Grigsby v. Russell that a life insurance policy is personal property that can be assigned or sold. Justice Oliver Wendell Holmes writes that a life insurance policy "is like other forms of property."

The AIDS epidemic creates an early secondary market as terminally ill policyholders sell their policies for immediate cash — what we now call viatical settlements. The concept of the life insurance secondary market is established.

The market expands beyond viatical settlements. Institutional investors begin purchasing policies from seniors aged 65 and older who simply no longer need coverage. Life settlement as a distinct category emerges and grows rapidly.

States begin passing comprehensive life settlement legislation. By 2010, over 40 states have enacted formal regulations governing broker licensing, disclosure requirements, and consumer protections.

The market matures and institutionalizes. Today, the life settlement market processes over $4 billion in annual transaction volume. Hedge funds, private equity firms, and specialty investment vehicles participate as institutional buyers. Pricing is competitive and transparent.

The single most important factor. Shorter life expectancy = higher offer. Medical records and LE reports from certified underwriters drive this assessment.

Larger policies attract more competitive bidding and achieve better percentage payouts. Minimum viable face value is generally $100,000.

The ongoing premium the buyer must pay reduces the net present value of the policy. Lower annual premiums relative to face value increase settlement offers.

Universal life and whole life policies are most liquid. Term policies are generally not eligible unless they have a conversion option that has been or will be exercised.

Buyers discount future cash flows using prevailing interest rates. Higher interest rate environments tend to reduce settlement offers modestly.

Policies with highly-rated carriers are more liquid and attract more buyers. Lower-rated carriers can still be settled but may command smaller offers.