After A Life Settlement Transaction, Are There Any Restrictions On How You Spend The Money?

After A Life Settlement Transaction, Are There Any Restrictions On How You Spend The Money?

So, you’re a senior and you wouldn’t mind a large lump sum of cash to spend any way you’d like. Who wouldn’t? Maybe you’re planning a long-awaited trip. Maybe you want to pay for a child’s wedding or help with college expenses. Or maybe you simply need the money for health care or other living expenses.

Whatever the reason, you may have access to cash from an asset you haven’t considered — your life insurance policy. While many people are aware that a life insurance policy has cash value, not everyone realizes that it may be sold in a life settlement transaction (sometimes referred to as a viatical settlement contract, although they are not identical). Best of all, there are no restrictions on the cash you receive, except that some of the proceeds may be subject to federal, state and local capital gains taxes.

How Does a Life Settlement Work?

Your life insurance policy is considered an asset that can be sold to a third party. This is called a life settlement, and the party that buys your policy becomes the new owner and assumes responsibility for paying the premiums. When you die, the new owner collects the death benefit.

Typically a life settlement involves a universal life, convertible term, joint survivorship, whole life or indexed universal life policy with a death benefit of at least $100,000. The policy owner is usually 70 or older (though some younger policy holders may qualify) who has experienced a significant change in health status since the policy was issued.

One of the factors that make a life settlement an appealing option to policyholders is that you can typically get several times the cash value, or surrender value, of the policy. Second, there are no restrictions on how you can spend the lump sum you receive.

With a life settlement contract, you’ll usually:

  1. Have an initial conversation with a life settlement provider about your personal situation. A life settlement broker represents you in an effort to get the maximum value for your policy.
  2. You complete an application that provides information about your policy, current health status and health history.
  3. Your broker will obtain offers on your policy from life settlement providers.
  4. If you accept an offer from a provider, the sale proceeds are held in escrow until the transaction is completed. When it is, the proceeds of the sale are released to you and you may spend them any way you like.

If you’re considering a life settlement, IMS Settlements can help you determine what your policy is worth and negotiate to help you receive the most cash for your policy. We work with a large network of buyers and have been assisting both life insurance policyholders and financial professionals to maximize the value of their policies for years. Contact us today for a free evaluation and to learn more about how we can help you.