Do you have a life insurance policy that you’re about to let lapse? Are you 65 years or older?
There’s a really good chance that your life Insurance policy could be a hidden asset that you didn’t even realize you have. In this post, we’ll be explaining life settlements and addressing some of the common questions policyholders have about them.
What Is a Life Settlement?
A life settlement is the sale of an existing life insurance policy. In a life settlement transaction, you agree to turn over ownership of the policy to a third party in exchange for an immediate payment. When you pass away, this third party then collects the death benefit from the policy.
Life settlements almost always involve the sale of permanent life policies (such as whole and universal policies, as well as term policies that can be converted into one of these types). The buyer will take over all future payments of the policy to keep it active until the insured's death.
Why Would I Want to Sell My Life Insurance Policy?
There are many reasons why someone would want to sell their life insurance policy. Usually, when most couples are young and first purchase their life insurance policies, it's intended to cover their living expenses if something unfortunate were to happen to one or both of them. However, as we get older, our dependency on life insurance policies changes. Perhaps you’re both retired now or one of you have passed on, and there simply is no longer a need for income replacement. Or the children have now become adults and moved out of the house.
As we get older, the cost of life insurance also starts to rise dramatically. Perhaps the cost has become too great and you no longer wish to pay to keep it active. Sometimes a life settlement can be a great way to receive an immediate cash payout for retirement, unexpected medical expenses, or even future nursing home care.
Am I Eligible to Make a Life Settlement?
Generally speaking, the best candidates for selling their life insurance policies are those who are closest to the average life expectancy (age 78.6 according to the CDC). A history of past illnesses or current poor health can also increase your chances of making a life settlement as well.
However, if you’re in perfect health, that doesn’t automatically exclude you from selling your policy either. At a minimum, most providers will consider you if you’re at least age 65 and your policy carries a death benefit of $100,000 or greater.
How Much Money Can I Make From a Life Settlement?
Many factors go into determining the value of a life settlement. Usually, these include considerations such as your health status, age, the ongoing cost of premiums, and many other details about your policy.
To give you a ballpark, most policyholders can expect to receive anywhere between 10 to 25 percent of the policy benefit amount. That would mean for every $100,000 of benefit, you might expect to receive anywhere from $10,000 to $25,000. However, keep in mind that this amount will also be decreased by the fees associated with the transaction, as well as taxes that will be collected by the IRS from the sale of the policy.
What Are the Risks of Making a Life Settlement?
Perhaps the biggest risk of making a life settlement is the fact that your intended beneficiaries will no longer receive a benefit upon your death. This is why it's important to make sure that they will truly no longer need this if something unfortunate were to happen.
In addition, life settlements can hinder your ability to receive Medicaid if you require it later on. It can also make it more difficult to obtain another life insurance policy if you try to purchase a new one.
How Do I Make a Life Settlement?
If you’ve taken all of these points into consideration and would like to move forward with a life settlement, the best thing to do is to work with a professional broker who can help secure the best deal for you. Work with a member of the Life Insurance Settlement Association (LISA).