Did you purchase a life insurance policy as a way to help reduce the burden of estate taxes on your loved ones? If so, you may not need the policy anymore. The results of the 2024 election have shifted the tax outlook for estate planning, with the estate tax exemption for 2025 and beyond likely to remain at higher levels than previously anticipated.
For policyholders who purchased life insurance to cover potential estate tax liabilities, this new tax landscape could mean that your policy is no longer necessary or financially beneficial.
If your policy no longer serves its original purpose, a life settlement might be a smart alternative. Let’s explore what the evolving tax landscape could mean for you and how a life settlement may help you offload unnecessary life insurance.
HOW THE TAX OUTLOOK HAS CHANGED FOR SOME POLICYHOLDERS
Estate tax exemptions determine how much wealth can be transferred to heirs without facing federal estate taxes. In recent years, these exemptions have remained at historically high levels. Current tax law sees an estate tax exemption sunset after 2025, reducing exemptions to pre-2018 levels. Following the 2024 election, proposals to permanently reduce these exemptions have lost momentum, making it likely that fewer families will face estate tax burdens.
How does estate tax affect life insurance? In most cases, life insurance is exempt from estate tax. Many individuals purchase life insurance policies to cover anticipated estate taxes, ensuring their heirs receive the maximum inheritance without a significant financial burden. However, with the likelihood of higher exemptions remaining in place, the need for large life insurance policies has gone down for many families.
Additionally, maintaining these policies can become costly, particularly as premiums increase with age. If your policy was primarily purchased to cover estate taxes, and that need no longer exists, it may be time to evaluate whether keeping your policy makes financial sense.
LIFE SETTLEMENTS: A WAY TO OFFLOAD UNNECESSARY LIFE INSURANCE
A life settlement is the process of selling your life insurance policy to a third party for a cash payout. The buyer assumes responsibility for future premium payments and becomes the policy’s beneficiary. As the policyholder, you no longer have to worry about paying premiums for a policy you don’t need, and you could see a significant payout.
This option can be especially beneficial for policyholders facing costly premiums or those who would rather use the policy’s value for other financial needs.
Key Benefits of a Life Settlement
Many life insurance policyholders don’t know about life settlements, so it may seem too good to be true at first glance. However, life settlements come with several important benefits that could make them a good fit if you don’t need your insurance, including:
- Access to cash: Receive a lump sum that can be used however you choose, from paying off debt to funding retirement.
- Relief from premium payments: Eliminate the financial strain of ongoing premiums.
- Maximizing policy value: Often, a life settlement offers more than the surrender value of your policy.
The biggest downside to a life settlement is the loss of insurance coverage. If you pass away after selling your insurance policy, your heirs are unlikely to receive a death benefit payout. In some cases, you may be able to retain a portion of your policy, but your heirs will still receive a reduced payout.
For policyholders whose financial situation or estate planning needs have changed, a life settlement can offer flexibility and financial freedom.
How Life Settlements Work
The life settlement process is relatively straightforward and typically involves the following steps:
- Evaluation: A third-party settlement provider or broker assesses your policy’s value based on factors like age, health and policy details.
- Offer: Your settlement broker shops your policy and collects offers from buyers, with amounts typically higher than the cash surrender value but less than the death benefit.
- Sale: Once you accept the offer, ownership transfers to the buyer, who assumes responsibility for premiums.
- Payout: You receive a cash payment with no further obligations.
It’s important to note that the amount you receive in a life settlement can vary based on your age, health, the type of policy and the market demand for life insurance policies. Working with a life settlement broker can increase your chances of getting the best price for your policy. A broker works as your advocate to market and sell your policy on the settlement market.
IS NOW A GOOD TIME FOR A LIFE SETTLEMENT?
With the estate tax exemption expected to stay high, policyholders who once maintained coverage as part of their estate planning strategies may find a life settlement an appealing financial strategy. Additionally, if your financial needs have changed or premiums have become unsustainable, exploring a life settlement could offer much-needed flexibility.
Consider these questions when looking at a life settlement as an option:
- Is my life insurance policy still serving its original purpose?
- Are the premiums creating a financial burden?
- Would my beneficiaries benefit more from a lump-sum payout now rather than a future death benefit?
- Have my estate planning needs changed?
Consult with a financial advisor to evaluate whether a life settlement aligns with your current goals. Consider the impact on beneficiaries, potential tax implications and how the payout can benefit your financial well-being.
IS A LIFE SETTLEMENT RIGHT FOR YOU?
In this evolving tax environment, life insurance policies intended to address estate tax liabilities may no longer be necessary. A life settlement provides a viable option to unlock your policy’s value now and unload expensive premium payments.
Rather than letting your policy lapse or surrendering it for a lower payout, consider exploring the life settlement market. You may find that the value you receive significantly outweighs other options.
If you’re ready to explore whether a life settlement is right for you, contact Life Settlement Advisors to learn more about your options. Our experienced team can help you navigate the process and make an informed decision tailored to your financial goals.
