Should I sell my life insurance policy?
Maybe this thought has crossed your mind. Or, maybe you didn’t even know selling your life insurance was an option to get out of an unnecessary or unwanted policy. With a life settlement, you can sell your policy to the highest bidder and get a lump sum of cash to put toward your current financial needs.
But, is selling a policy the best option for you? Selling a life insurance policy is a big decision and shouldn’t be taken lightly. Knowing how life settlements work, their pros and cons, and what alternatives are available can help you make an informed decision regarding your life insurance policy.
HOW DOES A LIFE SETTLEMENT WORK?
Life settlements work by allowing a life insurance policyholder — usually a senior citizen — to sell their insurance policy to a third-party buyer. This third-party buyer pays the policyholder a lump sum of cash for their policy, similar to how you might buy and sell a car.
The settlement buyer takes on the ownership of the policy and agrees to pay the premiums. In turn, the buyer becomes the beneficiary of the policy and collects the death benefit payout when the insured passes away.
LIFE SETTLEMENT PROS AND CONS
Selling your policy isn’t always an easy decision. Before you decide to enter a life settlement contract, it’s a good idea to know the pros and cons of settlements. Life settlement benefits include a quick cash payout for your policy, but your heirs won’t receive a death benefit when you pass away.
Explore the advantages and disadvantages of a life settlement to get a better idea of whether a life settlement is right for you.
Pros of Life Settlements
Why sell your life insurance policy? Some of the main reasons to explore life settlements include:
- Immediate cash payout: A life settlement means you get a quick cash payout for a life insurance policy you no longer need.
- Higher values than surrendering: Most settlements have much higher cash payout values than you’d get if you simply surrendered your policy to your insurance company.
- No surrender fees: Many insurance companies charge a surrender fee if you surrender your policy for a small payout, but a life settlement avoids those fees because the policy remains in force.
- Eliminates premiums: You’re no longer on the hook for premium payments when you sell your policy.
- Alternative to lapsing or surrendering: A life settlement gives you another option if you feel stuck in a policy or can no longer afford your premiums.
- Funds retirement or medical care: You’re free to use life settlement funds however you see fit — whether you want to invest them, fund your retirement, pay for expensive medical care or pay off outstanding debt.
Cons of Life Settlements
Despite the many benefits of selling your life insurance policy, there are a few drawbacks to consider, including:
- Tax implications: Payouts from a life settlement may be taxed as income, so you’ll want to speak with your tax advisor about potential tax implications.
- Reduced inheritance for heirs: The buyer becomes the new beneficiary of your life insurance policy once you sell it, meaning your original beneficiaries will no longer receive a payout from the policy when you pass.
- Must meet eligibility requirements: Not all policyholders or life insurance policies qualify for life settlements. For example, policies generally must have a face value of at least $100,000 to qualify.
LIFE SETTLEMENT ALTERNATIVES
A life settlement isn’t the only way to get out of an unneeded life insurance policy or get money to cover expensive medical or life expenses. Several alternatives to life settlement contracts may work for your current situation without cutting benefits for your heirs.
Surrender the Policy
One of the most common alternatives to a life settlement is to surrender your life insurance policy. Some people surrender their policies simply because they didn’t know life settlement was an option.
Surrendering a life insurance policy involves releasing it back to the insurance company. Your insurance company pays you a lump sum cash payout for the policy, known as the surrender value. You’ll likely be required to pay a surrender fee, which can lower the amount you receive for your policy. Additionally, the surrender value will likely be much lower than life settlement offers for the same policy.
Use Accelerated Death Benefits
Accelerated death benefit riders on your life insurance policy give you access to some of your policy funds to use for medical expenses before you pass. Generally, these benefits come with restrictions on when you can access the money and how you can use it.
Accelerated death benefits often make sense if you have a terminal or chronic illness or a specific disability. If you qualify for accelerated death benefits, your insurance company will release a certain amount of your death benefit for medical bills or other urgent financial needs.
Adding an accelerated death benefit rider doesn’t get rid of your policy, and having one will likely increase the cost of your premiums, so it’s typically not the best option if you need to lower your insurance costs.
Take Out a Policy Loan
Policyholders with permanent life insurance that has built substantial cash value can take out a policy loan. Policy loans use your cash value as collateral to give you a lump sum of cash. Your loan amount is generally no higher than the amount of cash value you have saved in the policy, and many life insurance companies restrict how much you can borrow to a percentage of your total value.
Any outstanding loan balances or interest charges when you pass away are generally taken out of the death benefit, reducing the amount your beneficiaries receive upon your passing.
SHOULD YOU SELL YOUR LIFE INSURANCE POLICY?
If you have a life insurance policy you don’t need or can’t afford, it can be hard to know what to do with it. Life settlements offer a way to get rid of your policy while also providing you with an influx of cash. Settlements are often a great option, but they won’t work for every financial situation. It’s important to work with your financial advisor and a tax professional to better understand what makes sense for your individual needs.
Unsure of where to start? Our team of settlement experts can help you understand how life settlements work and evaluate whether your policy is a good candidate for settlement. Get in touch with us today for a free consultation to learn if you qualify for settlement.
