If you find yourself with a life insurance policy you no longer need or cannot afford, a life settlement may be a financially sound solution for you. It isn’t a good choice for everyone, but it is a way to get money for your life insurance policy.
Before now, to surrender a whole-life/permanent life insurance policy you could either allow it to lapse or surrender it in exchange for a portion of your investment. Now there is a third option—a life settlement. Keep reading to learn about this solution to your financial needs.
What Is a Life Settlement?
Life insurance settlements are the process of selling your whole life/permanent life insurance policy to a third party. They pay you a settlement to obtain your policy. They then collect the death benefit when you die.
This option provides you with a better return than a surrender. It is only available to an insurance policy owner over age 65 or 70. The policy must be permanent life insurance.
Deciding to Sell a Life Insurance Policy
Most people purchase life insurance with a specific goal that no longer exists. For instance, when young you purchase a large whole life insurance policy.
If you die unexpectedly the benefits will help your spouse pay the mortgage and put your children through college. Your mortgage is now paid and your kids are through college.
With permanent life insurance, a portion of your policy premium is invested. This accrues, building a cash value on the policy.
You preserve the cash value of your policy by maintaining premium payments. If you stop paying premiums the policy will lapse.
If the policy lapses, you lose your investment. If you die with a policy lapse your beneficiaries receive nothing.
Surrendering your life insurance policy gives you its cash surrender value. This is the amount of money accumulated from the premiums you paid, less the surrender fee.
If instead of surrendering your life insurance you accept a life policy settlement, you are selling that policy to a third party.
Who Buys Life Insurance Policies?
When you enter into a life settlement agreement, you are not selling to a private person. You sell to a third-party broker or investment group. After completing the purchase they sell your policy to investment firms specializing in this area.
The investor pays you for the policy. They take over making premium payments. When you die, they collect the death benefit.
With this type of arrangement, you need to authorize the buyer access to your medical records. They need access at the time of sale, plus at regular intervals throughout your lifetime.
What Happens When You Sell
If you want to sell your life insurance policy you will receive a one-time cash payment. The payment will be higher than your surrender value but lower than the death benefit.
How much you receive depends on your premium payment, the death benefit, and your health. Every company weighs those factors differently to determine its purchase price. To make sure the company you are dealing with is reputable you may want to review the information of the National Conference of Insurance Legislators regarding life settlements.
Weigh the Pros and Cons
When deciding whether a life settlement is a good choice for you, weigh the pros and cons. Only you know if losing the death benefit and possible tax implications of receiving a large cash payment are a good option for you. Make sure the positives outweigh the negatives when planning to sell.
If you enjoyed learning about life settlements, we invite you to check out our blog for other interesting information on a wide variety of topics.