8 Common Myths About Life Insurance Settlements

Life insurance settlements can be a valuable option for seniors who no longer need or want their life insurance policies. However, many myths and misconceptions surround this topic, leading to missed opportunities. Below, we debunk eight common myths about life insurance settlements to help you make informed decisions.

Myth #1: Only Permanent Policies Can Be Sold

Reality: Even term life insurance policies can be sold, provided they are convertible and not past the conversion deadline. Term policies are actually the second most commonly sold type of life insurance after universal life. If you’re considering selling a term policy, start the process at least six months before the conversion deadline to ensure sufficient time for the settlement.

Myth #2: Only the Very Ill Can Sell Their Policies

Reality: While life insurance settlements originated in the 1980s as "viaticals" for terminally ill individuals, the market has evolved significantly. Today, relatively healthy individuals can also sell their policies. Investors consider factors such as life expectancy, premiums, and policy face value when making offers. Shorter life expectancies may yield higher payouts, but good health does not disqualify you from selling your policy.

Myth #3: Only Large Policies Can Be Sold

Reality: Policies with face values as low as $100,000 can often be sold, and in some cases, even smaller policies may qualify. While media coverage often highlights multi-million-dollar settlements, many investors are interested in smaller policies. Each investor has unique criteria, so it’s worth exploring your options regardless of your policy size.

Myth #4: Most People Sell Their Policies Due to Financial Hardship

Reality: The majority of people sell their policies because they no longer need them—not because of financial distress. For example:

• Retirement eliminates the need for income replacement.

• Homes are paid off, making mortgage-related coverage unnecessary.

• Business sales or asset disposals render key-man or other coverage redundant.

• Changes in estate tax laws (like the 2017 Tax Cuts and Jobs Act) have reduced the need for estate tax-related policies.

• 
  

Additionally, some policies become too expensive to maintain in retirement or are nearing expiration. In these cases, a life insurance settlement can provide better value than surrendering or lapsing the policy.

Myth #5: Clients Must Sell Their Entire Policy

Reality: You don’t have to sell your entire policy. Partial sales are an option. For instance, if you have a $1.5 million policy but only need $500,000 in coverage moving forward, you can sell $1 million of the policy while retaining $500,000 in death benefits.

Myth #6: Only Seniors in Their 80s Can Sell Their Policies

Reality: While life insurance settlements are generally most beneficial for individuals aged 65 and older, there is no strict age limit. Investors evaluate each case individually based on factors like health and policy details. A settlement broker can help match your unique situation with an investor’s criteria.

Myth #7: Only Wealthy Clients Benefit from Life Insurance Settlements

Reality: Life insurance settlements are accessible to a wide range of clients—not just the wealthy. Policies with face values starting at $100,000 make this option available to many individuals who no longer want or need their coverage.

Myth #8: Life Insurance Settlements Are Not Well-Regulated or Are Illegal

Reality: Life insurance settlements are both legal and highly regulated. A landmark 1911 U.S. Supreme Court decision affirmed that life insurance policies are personal property that can be sold like any other asset. Today, 43 states and Puerto Rico regulate life insurance settlements, covering about 90% of the U.S. population.

Regulations ensure transparency and consumer protection by requiring:

• Disclosure of offer details and sales commissions.

• Alternatives to selling a policy.

• Consent from beneficiaries.

• Mandatory waiting periods (e.g., two years in California with exceptions).

Thanks to these safeguards, there have been no consumer complaints against licensed settlement companies since 2012.

Life insurance settlements aren’t suitable for everyone, but they offer significant value when other options—such as keeping or surrendering a policy—are no longer viable. If you’re considering lapsing or surrendering your policy, explore whether a settlement could provide greater financial benefits for you or your loved ones.