Understanding Life Settlement Eligibility: Who Qualifies and How It Works

For many seniors, life insurance was once purchased as a safety net for their families. But as time passes, priorities change. The kids are grown, the mortgage is paid off, and that life insurance policy might no longer serve the same purpose it once did. If you're a policyholder wondering what to do with an unwanted or unaffordable life insurance policy, a life settlement might be a smart financial move.

In this article, we’ll explore life settlement eligibility, what it means, who qualifies, and how to navigate the process. Whether you're planning for retirement or reassessing your financial future, understanding your options is essential.

What is a Life Settlement?

A life settlement is the sale of an existing life insurance policy to a third party (usually an institutional investor) for a lump sum that is greater than the policy’s cash surrender value but less than its death benefit. After the sale, the buyer becomes the policy’s beneficiary, pays the premiums, and eventually receives the death benefit.

It’s a financial tool that can help seniors unlock value from a policy they no longer need or can no longer afford.

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Life Settlement Eligibility: Who Can Qualify?

Not every policyholder qualifies for a life settlement. There are several key factors that determine life settlement eligibility, and meeting these criteria is essential if you’re considering this option.

1. Age of the Policyholder

Typically, policyholders must be at least 65 years old to qualify. However, younger individuals with serious health conditions may also be considered.

The older you are, or the more significant your health impairments, the more likely you are to qualify—and receive a higher offer. This is because investors weigh the life expectancy of the insured to assess the potential return on investment.

2. Health Status

Health plays a crucial role in determining eligibility. Policyholders with moderate to severe health issues are more likely to receive competitive life settlement offers. This doesn’t mean you must be terminally ill, but conditions such as heart disease, cancer, or diabetes can increase your chances of qualifying.

3. Policy Type

Not all policies are eligible. The following types of policies are generally acceptable:

• Universal life

• Whole life

• Convertible term life

• Some group life policies (with limitations)

Term life policies must usually be convertible to permanent policies to be considered for a life settlement. Investors want to ensure that premiums can continue to be paid indefinitely.

4. Policy Face Value

Most life settlement companies require a minimum face value of $100,000. Policies with lower death benefits typically don't offer a strong enough return on investment for buyers.

5. Premium Costs

Policies with high annual premiums may not be attractive to buyers unless the death benefit is substantial. Lower ongoing premium payments make a policy more appealing in the secondary market.

6. Policy Ownership and Status

You must be the legal owner of the policy, and it should be in force—not lapsed. Also, your policy should be beyond the contestability period, which is usually the first two years after issuance. During this period, insurers can dispute or deny claims, making the policy a less stable investment.

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Reasons People Consider Life Settlements

If you meet the eligibility criteria, selling your life insurance policy might make sense in several situations:

• You no longer need the coverage (e.g., no dependents)

• Premiums have become unaffordable

• You want to supplement retirement income

• You’re dealing with unexpected medical costs

• You’re downsizing your estate or reallocating financial priorities

A life settlement gives you the ability to monetize an asset that would otherwise lapse or be surrendered for less value.

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The Life Settlement Process: What to Expect

If you think you meet the life settlement eligibility requirements, here’s how the process typically works:

1. Initial Evaluation
   You or your advisor contacts a life settlement company or broker to see if you qualify.

2. Medical Records and Policy Review
   You'll provide information about your health and your insurance policy.

3. Life Expectancy Estimate
   A third-party underwriter evaluates your health and estimates your life expectancy, which influences your offer.

4. Receive an Offer
   If eligible, you'll receive a cash offer. It’s often several times more than the cash surrender value.

5. Accepting the Offer and Closing
   If you accept, legal documents are signed, the buyer becomes the new policy owner, and you receive your lump sum.

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Tax Considerations and Advice

The proceeds from a life settlement may be subject to income and capital gains taxes, depending on how much you've paid in premiums and your policy’s cost basis. It's wise to consult a financial advisor or tax professional to understand the tax implications before proceeding.

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Final Thoughts

A life settlement can be a strategic financial tool for those who qualify. But it’s not a one-size-fits-all solution. Understanding life settlement eligibility is the first step in determining whether this option aligns with your financial goals.

If you’re over 65, have a life insurance policy with a value of at least $100,000, and your health has declined since you first took out your policy, you might be sitting on untapped financial value. Exploring your eligibility and consulting with a licensed life settlement provider or advisor could open the door to greater financial freedom in your retirement years.