A life settlement can provide an alternative return on investment.

Life insurance is one way to invest in the future support of your loved ones.

At the same time, it can also feel like a financial risk.

Some people find they never need their policy and receive little to no return on their investment.

According to a recent Omaha World-Herald article titled "How an Omaha man turned his life insurance policy into a $745,000 payout," a life settlement agreement may provide a way to mitigate the risk of loss.

A life settlement can help pay for expenses like long-term care.

This was the reality of a 77-year-old resident of Omaha, Nebraska.

The man owned two life insurance policies with payouts totaling $1.15 million.

He realized he no longer needed these policies.

He would not have received a penny if he had let them lapse.

By surrendering the policies, he would have netted $48,500.

The man chose a third option.

He decided on a life settlement.

As a result, he received a $745,000 payout for his policies.

How does a life settlement agreement work?

Essentially, the policy is sold to a life settlement provider or a life settlement company.

These are generally institutions.

The life settlement buyer then chooses to hold the policy to maturity or resell the whole policy or interests in multiple policies bundled together to hedge funds or other investors.

The policyholder receives a single payment in exchange for the policy.

Although many companies hold term life insurance, whole life insurance, universal life insurance, and guaranteed universal life insurance policies, policyholders often do not know the value of these assets.

The life settlement company for the man from Omaha reviewed bids for the policy from various institutional buyers.

These larger companies often use actuarial data to predict life expectancy from medical records provided by the seller.

The settlement amount is determined based on the expenses of keeping the policy and the life expectancy of the policyholder.

Companies can be competitive when bidding over policies.

For the man in Omaha, the final $745,000 was $300,000 greater than the first bid.

Simply selling the policy to a single company on a television ad may not be the best option.

Why?

These companies are only providing a single bid.

A larger life settlement may be reached with multiple bidders and some patience.

Whether you do not need life insurance anymore, need the money to pay for long-term care, or could use the "death benefit" while living, a life settlement may be a prudent alternative to letting the policy lapse or surrendering the policy.

Reference: Omaha World-Herald (July 19, 2023) "How an Omaha man turned his life insurance policy into a $745,000 payout"