Are Life Settlements Safe and Legal?

Your life insurance policy is a personal financial asset that could provide you with a source of much-needed funds. Since you own your policy, you have the legal right to sell it.  ​

The life settlement industry is well-established and well-regulated in America. 43 states have laws that govern life settlements and protect consumers from fraud. These laws give more than 90% of Americans the right to safely sell their life insurance policies instead of letting them lapse or cashing them in for a fraction of the premiums they’ve paid over the years.  
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Both cashing in a life insurance policy and letting it lapse relieve the policyholder of the burden of paying ongoing premiums. These actions cancel the policy, so there’s no death benefit to the beneficiaries in the future.  
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A series of lawsuits against life insurance companies across the country alleging that the companies failed to inform their clients of the life settlement option in order to generate greater profits has brought the issue to light for lawmakers.  
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A life settlement offers the policyowner more money than they would receive if they cashed in their life insurance. Lawmakers recognize that life settlements can provide consumers with the money they need in exchange for an obsolete, unwanted, or unaffordable insurance policy.  
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NCOIL Life Insurance Consumer Disclosure Model Law 

The NCOIL Life Insurance Consumer Disclosure Model Law requires insurance companies to let policyholders know about life settlements as a potential alternative to letting a policy lapse or cashing it in. While the laws vary greatly from one state to the next, they all exist to provide the consumer with the information they need to make good financial decisions.  
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For example, in Kentucky and Washington, the insurance commissioner has the power to define triggers that compel insurance companies to notify policy owners of life settlements as an alternative to lapse or surrender. In Oregon, a more specific statute states that an insurer will “provide notice to the owner of an individual life insurance policy when the insured person under such a policy is 60 year of age or older” upon the insured person notifying the company that they wish to surrender the policy in part or in whole, or if the owner requests an accelerated death benefit.  
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In Maine, Washington, and Kentucky, laws require insurance companies to notify insured people over the age of 60, those that become terminally ill, and those that become chronically ill, that life settlement is an option.  
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Disclosure laws 

In Georgia, lawmakers recognize that seniors often surrender life insurance policies so they can qualify for Medicaid. They formed a committee to study life insurance issues as they apply to seniors. In 2016, Georgia was the first state to pass a law that prevents life insurance companies from penalizing insurance agents who tell their clients about alternatives to surrendering or lapsing life insurance policies.  
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When a policyholder allows their insurance to lapse or surrenders it for the cash value, the life insurance company never has to pay a benefit. In fact, the premiums that the policy owner paid over the years are pure profit for the insurance company. The London Business School conducted a study in 2014 showing that Americans who sold their life insurance policies through a life settlement receive more than four times the amount of money that they collectively would have if they had simply surrendered the policies for their accumulated cash value.  
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The insurance industry lobbies against legislation for consumer disclosure about the life settlement option.  
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Waiting periods 

30 of the 43 states with laws in place to regulate life settlements have a mandated two-year waiting period before a life insurance policy is eligible for sale. 22 states enforce a 5-year waiting period. Selling the policy before the waiting period is allowed under certain circumstances, such as terminal illness, divorce, physical or mental disability, chronic illness, or retirement.  
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The only states that do not regulate life settlements are Michigan, New Mexico, Missouri, South Dakota, Washington D.C., Wyoming, South Carolina, and Alabama. However, Missouri has a one-year contestability period and the other unregulated states have a two-year contestability period under their insurance code.  
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Required transparency is consistent with state laws 

A key point of life settlement laws is the call for transparency. Consumers have the right to see all offers to purchase their life insurance policy in writing. Brokers must disclose their fee structure in writing when asked. Many states also require that consumers receive information about possible tax ramifications, alternatives to settlements, and potential risks of losing government assistance.  
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Life settlement brokers and providers must hold the appropriate licenses in the home state of the policy owner. Many states require that life settlement companies submit forms for escrow agreements, disclosures, and the life settlement contract for approval, as well.  
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The life settlement industry exists to serve seniors who no longer need their life insurance policy 
Legislators continue to introduce new laws that help educate seniors about to access Medicaid that they can use proceeds from a life settlement to help pay for their long-term care.  
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Life settlement proceeds have the potential to prevent many seniors from accessing Medicaid, providing a huge social benefit to Americans. In Texas, a Medicaid Life Settlement bill has helped many seniors better understand their options regarding their financial assets.  
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Life settlement safety 

The best way to keep your privacy intact, protect your personal information, and get a fair price for your life insurance policy through a life settlement is to learn as much about the process as possible. Educate yourself about your state’s laws.  
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Life settlement laws are always changing. For the most part, they exist to protect consumers. One advantage to having a broker represent your interests in a life settlement is that they can be your single point of contact regarding your state laws and any applicable federal regulations.  ​