Life Needs, Ownership & Settlements

CARD T094

Needs Analysis

Estimating coverage from a person’s financial obligations and available resources. Income replacement, debt, and dependents’ needs may be considered.

How it works

Needs analysis estimates obligations and income needs, then accounts for available resources and existing coverage. Include final expenses, debts, dependent support, education, and other relevant goals without double-counting. A simple arithmetic example may ignore timing; a fuller analysis considers inflation, investment assumptions, and how long resources must last. [30]

EXAMPLE

For a simplified estimate, identified needs total $600,000 and available resources plus existing insurance total $200,000. The remaining gap is $400,000.

Key distinction

Needs approach starts with obligations and resources. Human life value starts with the person’s future economic contribution.

Practice Needs Analysis · 3 questions

CARD T095

Human Life Value

An estimate of a person’s future financial contribution, often using earnings and expenses. It is one approach to assessing life insurance needs.

How it works

Human life value estimates the financial support a person would have provided through future earnings. It can subtract taxes and the person’s own living expenses, then estimate the amount available to dependents over the remaining working years. Future amounts are usually converted to a value in today’s dollars: money available now can earn interest before it is needed. This conversion is called discounting. The result is a financial estimate, not a measure of someone’s personal worth. [2]

EXAMPLE

A worker’s estimated annual contribution to dependents is $40,000 for 10 years. Before discounting, that totals $400,000; a positive discount rate makes the present value lower if other assumptions are unchanged.

Key distinction

Human life value emphasizes future contribution. A needs analysis itemizes obligations and offsets resources.

Practice Human Life Value · 3 questions

CARD T096

Third-Party Ownership

Policy ownership by someone other than the insured. A business owning life coverage on a key employee is an example.

How it works

Third-party ownership means the policyowner and insured are different. The owner exercises contractual rights, subject to assignments and irrevocable beneficiary rights. Insurable interest and consent rules apply when coverage is obtained on another life. Ownership, insured status, premium payment, and beneficiary status can belong to different parties. [11] [29]

EXAMPLE

A business owns and pays for a policy on a key employee and is the beneficiary. The employee is the insured, but does not automatically hold the owner’s surrender or beneficiary-change rights.

Key distinction

Being the insured does not automatically mean owning the policy.

Practice Third-Party Ownership · 3 questions

CARD T097

Life Settlement

Sale of an existing life policy to a third party for an agreed amount. The buyer typically takes over premiums and receives the death benefit.

How it works

A life settlement sells an existing policy to a third party. The owner receives an agreed payment, and the buyer generally takes over premiums and receives the death benefit. The price is commonly less than the death benefit and may exceed surrender value. Compare alternatives, fees, privacy, taxes, and eligibility for public benefits. A legitimate later sale is distinct from improper STOLI origination. [31]

EXAMPLE

An owner accepts an agreed cash payment and transfers an existing policy to a buyer. The buyer becomes responsible for future premiums and the original beneficiary generally loses the transferred benefit interest.

Key distinction

Settlement = sale to a third party. Surrender = termination with the issuing insurer. A policy loan is neither.

Practice Life Settlement · 3 questions

CARD T098

Viatical Settlement

A life-policy sale involving an insured who meets applicable terminal- or chronic-illness criteria. Legal definitions and protections vary.

How it works

A viatical settlement is a life-policy sale involving an insured who meets applicable terminal- or chronic-illness criteria. The seller, often called the viator, receives a negotiated amount while the buyer acquires the policy interest. This differs from an accelerated death benefit paid by the insurer under the existing contract. Tax exclusions have specific conditions and are not automatic for every sale. [19] [32]

EXAMPLE

An eligible seriously ill insured’s policy is sold to a viatical settlement provider. An insurer paying a qualifying accelerated benefit under its own rider is a different transaction.

Key distinction

Viatical settlement involves a sale; an accelerated death benefit uses a provision of the existing insurance contract.

Practice Viatical Settlement · 3 questions

Sources & further reading

Original explanations and practice scenarios informed by the following regulatory, legal, and product resources. State examples are not presented as nationwide deadlines or requirements.