Retained Death Benefit Settlements: How They Work

The aging US population is leading to notable financial planning shifts. As people reach the age of 65, they face decisions impacting their quality of life. Among these, modifying an existing life insurance portfolio is significant. Changes in life circumstances can affect the need for insurance.

Many people find they no longer require the original amount of life insurance coverage. However, they might still want some protection. This is where a Retained Death Benefit life settlement can be beneficial. It allows the insured to retain a portion of their life insurance benefits. There are no premium obligations to worry about, and upfront cash options are available.

What Is a Retained Death Benefit Life Settlement?

A Retained Death Benefit (RDB) life settlement is a financial arrangement. The policyholder sells their existing life insurance policy to a third-party buyer. In return, the buyer assumes the premium payments and becomes the policy’s owner. The seller retains a portion of the death benefit, specified between the buyer and seller.

The buyer designates the insured’s beneficiary as an irrevocable beneficiary for a part of the policy’s death benefit. This means that when the insured passes away, the designated beneficiaries receive a portion of the death benefit. The rest is kept by the buyer, often enabling the insured to access much-needed cash during their lifetime.

The Process Works as Follows:

• Ownership Transfer: The buyer purchases and becomes the sole owner of the policy.
• Assumption of Premium Payments: The buyer takes over all premium obligations.
• Hybrid Offers: Some agreements may combine upfront cash and retained death benefits.
• Designation of Beneficiaries: The buyer ensures the insured’s chosen beneficiary is listed as an irrevocable beneficiary.

Policy Requirements

To qualify for a Retained Death Benefit life settlement, certain criteria need to be met:

• Minimum Age: 70 years or older.
• Face Amount: At least $100,000 or more.
• Policy Types: Convertible Term, Universal Life, Survivorship Universal Life, Whole Life, Indexed Universal Life, Variable Universal Life.
• Policy Issue Date: The policy must be at least 24 months old.
• Health Conditions: The insured can have minor, moderate, or major health conditions.

A Practical Example

Imagine an 85-year-old insured with a $2,500,000 policy. The annual premium is $115,000 with a surrender value of $0. In this case, the insured could engage in a life settlement. They might receive a cash payout of $210,000 and a retained death benefit of $1,300,000 until policy maturity. This means a significant sum of money is available now, along with continued life insurance coverage.

Benefits of a Retained Death Benefit Settlement

Retained Death Benefit life settlements provide flexibility. Individuals can adapt their life insurance policies to better meet their current needs. They help reduce financial burdens by eliminating future premium payments. This can be a lifeline for those who might struggle with the ongoing costs of maintaining a policy. Additionally, it allows for immediate access to cash for unforeseen expenses or financial goals.

Considerations and Final Thoughts

Engaging in a Retained Death Benefit life settlement requires careful consideration. The insured needs to understand the impact of selling a portion of their life insurance policy. It’s essential to analyze if retaining a death benefit portion aligns with their financial goals. Consulting with a financial advisor can help navigate these considerations.