Life Settlements Can Increase Policy’s Worth

By Richard E. Nottingham CLU, ChFC

life insurance settlements trainingRecently, I helped a client sell a no-longer-needed life insurance policy for far more than its cash surrender value. The policy’s cash surrender value was $61,000. Instead, via life settlement, they received a check for $540,000.

A life settlement is a transaction involving the sale of an existing life insurance policy by the policy’s owner to a life settlement company. The result of this strategy can net the policy owner a sum many times greater than the policy’s cash value and provide the policy owner substantially more than the total premiums paid for the policy since its inception.

Until a few years ago, a policy owner who no longer needed a life insurance policy, or who could no longer afford the premiums, had no choice but to surrender the policy to the issuing insurance company for its cash value, or in the case of term insurance, to simply let the policy lapse.

The inception of the life settlement industry, however, has created a new option for policy owners, often with favorable results. Who is eligible to benefit from life settlement transactions? Life settlement companies buy policies with the intention of paying premiums until the death of the insured, then collecting the death benefit. Generally, these companies will purchase policies that insure persons with life expectancies of up to 12 years, and with policy face amounts of $250,000 and greater. Therefore, seniors age 75 and older, even if their health is good, may be excellent candidates to benefit from the sale of their life insurance.

Why might a senior citizen want to sell a policy? First because a policy is no longer needed. Examples of this circumstance are numerous. A husband may have maintained a life insurance policy to provide cash to his wife upon his death, but now his wife has predeceased him. Or the coverage may have existed to fund a business-related need such as a buy/sell agreement, and now the insured has sold his interest in the company and retired. Perhaps the policy was intended to pay federal estate taxes upon the death of the insured, but changes in the tax laws or changes in the estate planning goals of the insured now make the policy unnecessary. Many seniors today have no estate tax liability, whereas several years ago their heirs would have faced a significant estate tax obligation.

A second reason to consider life settlement is because the policy is no longer affordable. Frequently, policy owners today are faced with premiums much larger than when they purchased the coverage. This is true with term insurance, since premiums escalate drastically in the later years of the insured’s life. Or, many seniors are insured with interest-sensitive whole life or universal life policies requiring much higher premiums to maintain them than were originally projected when the policies were purchased. Further, many seniors have smaller incomes than during their working years, or they must redirect some of their income to meet medical or long-term care expenses.

What are some examples of life settlement results? A 70-year-old widower sold a $500,000 policy for $70,000. If he had cashed in the policy he would have received only $27,000. His result was a $43,000 profit.

In another example, a 77-year-old man sold his $500,000 policy for $97,000. The policy’s cash surrender value was only $6,000. Thus he received $91,000 more as a result of a life settlement than he would have netted by simply surrendering the policy.

In a third example, an 85-year-old widow sold her $5 million policy and received $1.63 million. The policy’s surrender value was only $141,000, so her life settlement netted an improvement to her of almost $1.49 million.

These are only three outcomes of successful life settlement transactions. By the end of 2012, life insurance policy owners who sold their policies to life settlement companies had received more than $5.62 billion in excess of the cash surrender values of these contracts. Articles describing the benefits of life settlements to policy owners have appeared in publications such as the Wall Street Journal, Trusts and Estates Magazine, The Journal of Accountancy, and The Journal of Financial Service Professionals.

How can policy owners determine whether a life settlement is appropriate for them? The answer is to have the policy appraised, at no cost or obligation. With respect to life settlements, appraisal refers to the process of determining what a life settlement company would pay to buy a policy. This appraisal costs the policy owner nothing, and it does not obligate the policy owner to sell the insurance unless the policy owner chooses to do so. It only involves giving the life settlement company the right to review the insured’s medical history, and to learn details about the insurance policy being considered for purchase. No medical exam is required. In order to maximize the offering price, however, it is essential to have the policy appraised by numerous life settlement companies in order to create a competitive bidding environment.

What options exist for a policy owner after the appraisal process is complete? If an offer is made to purchase the policy, the policy owner can accept it or reject it. If accepted, the proceeds from the sale can be used by the policy owner as the owner chooses. Often the proceeds are reinvested, used to meet costs associated with long-term care, gifted to family members or charities, or used to acquire new life insurance or long-term care insurance.

Before deciding to accept a life settlement offer, the policy owner should seek both legal and tax advice from an attorney and a certified public accountant. Tax consequences of life settlements are quite favorable, and often little or no income tax is due on the amount received. However, the opinions of these legal and financial professionals are important to be sure the transaction is in the best interests of the policy owner and the policy’s beneficiaries.

To begin the process in Virginia and in most states, it is necessary to involve the services and expertise of someone who is licensed to broker life settlement transactions.

A competent licensed broker will also solicit bids from every buyer licensed to operate in your state of domicile, and will keep the seller advised with regard to all offers to purchase that are received.


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Richard E. Nottingham CLU, ChFC   For 43 years, Mr. Nottingham has built a reputation as one of the leading Financial Services Professionals in Hampton Roads, Virginia. A graduate of Old Dominion University with a Bachelor of Science Degree in Business Administration, he has earned the professional designation of Chartered Life Underwriter, Chartered Financial Consultant and Accredited Estate Planner. Dick has been an instructor for the Life Underwriters Training Council and the Society of Financial Services Professionals. He is a Life and Qualifying member of the Million Dollar Round Table, having earned membership rights in that organization every year since entering the profession. Mr. Nottingham has qualified as a member of MDRT’s Top of the Table for 11 years

During his career, Mr. Nottingham has assisted hundreds of Business Owners, Professionals and Retirees in the design and implementation of business continuation, selective executive fringe benefits, long term care, and wealth preservation strategies. In addition, Mr. Nottingham has gained recognition as an expert in negotiating Life Settlements for clients who wish to sell an unneeded life insurance policy. Richard Nottingham, CLU, ChFC, AEP can be reached at (757) 472-2233 or

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