Playbooks/Settlement vs lapse
A policy about to lapse may be an asset the client does not know they hold. What a life settlement is, when it fits, and the questions that have to be answered before anyone mentions it.
What is the fair market value of a life insurance policy?
The price a third-party buyer would pay for it in a life settlement — more than the cash surrender value, always less than the death benefit. It is driven mainly by the insured's life expectancy and the cost of keeping the policy in force, so two policies with the same face amount can be worth very different amounts. It is established by soliciting offers, not by a formula.
A client stops paying a policy they no longer want. It lapses, or they surrender it for whatever cash value has accumulated, and everyone involved treats that as the end of the matter.
In some cases it is not. The policy may have a market value above its surrender value, and a client who lapses it has thrown away an asset without knowing they held one. That is worth understanding — carefully, because this is a regulated transaction with a history that warrants caution.
A third party buys an in-force policy from its owner for a lump sum greater than the cash surrender value. The buyer becomes the owner, pays the premiums from then on, and receives the death benefit when the insured dies.
The value sits between two bounds and never outside them:
Where it lands between those is mostly a function of life expectancy and the cost of keeping the policy in force. A shorter expectancy means fewer premiums for the buyer and a sooner payout, which raises the offer. This is why two policies with identical face amounts can be worth wildly different sums, and why no online calculator can tell anyone what their policy is worth. The value is established by soliciting offers.
Narrow, and worth keeping narrow:
If the coverage is still needed, this conversation should not happen. A client who sells a policy they will later want cannot simply buy it back — they will be older, and possibly uninsurable. The default answer for a policy that is still doing a job is to find a way to keep it: reduce the face amount, use cash value to cover premiums, restructure. Selling is the option when the job has ended.
Two further cautions worth stating plainly. Proceeds are generally taxable, in tiers, under rules that changed in 2017 — the client's tax adviser needs to see the numbers before an offer is accepted. And a lump sum can affect means-tested benefits, including Medicaid eligibility, which has caught people out.
Here is where this connects to the rest of the book. By the time a policy lapses the option has gone. The cases are identifiable in advance, and they have a shape:
That is the same list a lapse-prevention review produces. The difference is what happens at the end of it: for most policies the right outcome is keeping them in force, and for a small number the right outcome is a conversation the client did not know was available.
Recognising the case is the agency's job. Brokering the transaction generally is not, unless appropriately licensed in the relevant state — and the licensing requirements exist precisely because this market has a history of people being badly served.
The defensible position is straightforward: find the policies at risk, review them with the client, keep the ones worth keeping, and where a policy is genuinely heading for lapse, make sure the client knows a market exists before it does — then refer them to someone qualified, and document that you did.
The price a third-party buyer would pay for it — which can exceed the cash surrender value and is always less than the death benefit. It is driven mainly by the insured's life expectancy and the cost of keeping the policy in force, so it varies enormously between two policies with identical face amounts. It is established by an offer, not by a formula.
The sale of an in-force life insurance policy to a third party for more than its cash surrender value. The buyer takes over the premiums and receives the death benefit. It is regulated at state level, most states impose a waiting period after issue, and both brokers and providers are generally required to be licensed.
When a policy is genuinely no longer wanted and the alternative is lapse or surrender — typically an insured over roughly 65, or younger with significantly impaired health, holding a policy whose original purpose has ended. If the coverage is still needed, the question is how to keep it, not how to sell it.
Generally yes, in parts, and the treatment is not simple. Proceeds are typically taxed differently up to the cost basis, between basis and cash surrender value, and above that. The rules changed under the 2017 tax act and vary by circumstance, so this is a question for the client's tax adviser before any offer is accepted, not after.
A viatical settlement involves an insured who is terminally or chronically ill, and receives different tax treatment. A life settlement involves an insured who is not. The two are regulated separately in many states, and the distinction matters for both taxation and licensing.
Not advice. This page describes how these situations generally work. Policy terms, carrier rules and state regulations vary, and the governing document is always the contract. Confirm anything you act on with the carrier, and take compliance questions to your own counsel or compliance officer.
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