A life insurance settlement refers to selling a life insurance policy to a third party buyer in exchange for a lump sum amount. After the settlement of the policy, the original owners are no longer responsible for paying the premiums. On maturity of the policy, they will not receive any amount as maturity benefit. However, if the policy owners need to raise money for any financial requirement, there is no need to sell the policy. Policy owners can obtain a life insurance settlement loan against the policy.
Term life insurance provides death protection for a definite time period and is perhaps the simplest form of life insurance. It is basically designed to provide temporary life insurance protection on a restricted budget. It can be bought in large amounts for small premiums and hence it is suited for short-range goals.
Term life insurance policies also have the advantage of having adjustable premiums. Depending on the financial state of the policy buyer, premiums can be altered. The premiums may, however, be never raised above the maximum number of premiums stated in the policy. There is also a provision for renewing the policy when the original term ends.
To apply for a life insurance settlement loan, the borrower needs to state the reason for the financial requirement in detail. This is where life insurance settlement loan differs from settlement, as there is no need to answer questions about the use of money. The life insurance settlement loan is required to be repaid over a certain period of time. The installments for repayment are monthly as in case of any other loan. The main advantage of such a loan is that, the policy owners get to keep the policy and also receive all the maturity benefits.The insurance company applies a rate of interest on the loan during repayment. The policy papers are withheld with the insurance company till the loan is repaid. The policy is considered locked during this period. Policy owners are required to continue paying their premiums for the policy, in addition to the installment on the loan.