From the Journal of Accountancy:
WHEN INDIVIDUALS OR BUSINESSES HAVE UNNEEDED life insurance policies they have three options: continue paying the premiums until the insured’s death, surrender the policy for the cash value or find a third party to buy the policy in a life settlement transaction. The last alternative usually is the most attractive if the insured is over 65, has experienced a change in health and has a life expectancy of 2 to 12 years.
LIFE SETTLEMENT TRANSACTIONS USUALLY result in higher returns for the policy owner than simply surrendering the policy. The actual settlement depends on the policy’s face amount and cash surrender value, the insured’s health and age and the current policy premium.
THE FIRST STEP IS TO SELECT A BROKER TO HELP get the best possible offers for the policy. The broker will help choose an appropriate provider. An institutionally owned and funded provider usually has more cash available to invest in policies and will adhere to high ethical standards.
A VARIETY OF SITUATIONS CAN CREATE THE NEED for a life settlement, including a change in the policyholder’s business situation, a need for cash to fund medical or long-term care, changes in the insured’s estate, bankruptcy or divorce.
LIFE SETTLEMENT TRANSACTIONS MAY BE SUBJECT to income taxes. The actual amount of taxable income depends on the policy’s cash surrender value, cost basis (total premiums paid) and how much the policy owner receives for the policy. Some of the proceeds may be ordinary income and some may be treated as a capital gain.