Life settlements are life insurance policies that are sold by individual life policy owners to a licensed buyer known as a life settlement provider. Amy Danise, Editor of Forbes Advisorexplains, “Life insurance is a way to support your loved ones financially after you die, but what few people realize is that a life insurance policy is also considered property. That means it can be sold”. You can do so through a transaction called a life settlement or viatical settlement.
Think of it as a lifeline. Perhaps you don’t have any dependent children but could use extra money for medical bills, long-term care, memory careor to supplement your retirement.Selling your life insurance policy could provide the financial help you need.
Premiums Too Expensive?
If yourpolicy premiums are becoming too expensive, consider selling your policy. You’ll not only receive a lump sum payout, but will eliminate costly premiums. After the sale of your life insurance policy (life settlement) to a licensed buyer, it is the buyer’s responsibility to pay all future policy premiums. The amount you receive will be based on certain factors including your age, health and type of policy you own, however, your payout will be always greater than thesurrender valuebut less than thedeath benefit.
Are You Eligible to Sell Your Life Insurance Policy?
Before selling a life insurance policy, it’s important to verify eligibility. There are certain conditions that have to be met to sell a life insurance policy.
In order tosell your life insurance policy, your policy must meet certain criteriafor a third party to decide to purchase the policy. The main factors determining the qualification for a cash settlement include your age, health and type of policy. Typically, you must be 70 years or older to qualify or be diagnosed as terminally ill. For life settlement purposes, many state statutes deem an individual to be terminally ill (no age limit) if they have a life expectancy of fewer than two years or are chronically ill and unable to perform at least two activities of daily living such as bathing, eating, dressing or toileting.
In addition to age, health and type of policy, most investors consider the coverage amount of the life insurance policy. In many cases, the minimum policy death benefit for investors is $250,000.
The most common types of life insurance policies that are sold are term life, whole life, and universal life. The purchase amounts will differ depending on the characteristics of the policy. For example, can the premium payments be flexible or must they be paid as shown on the billing statement? Some settlement offers allow the policy owner to sell the policy but retain a portion of the death benefit for his or her beneficiaries. Often, there are transactional fees associated with the sale of a policy and are typically disclosed in your sale paperwork according to life settlement laws of the state where you live.
It is important to note that you may be taxed on proceeds so speak to a tax advisor before making any decisions. Generally, the amount of the sale proceeds that equals the total amount of premiums you have paid over the life of the policy (known as your cost basis) is free from tax. If your policy has a cash valuethat is greater than the cost basis, then the portion of your payout greater than your basis up to the cash value will be taxed as ordinary income. Finally, the amount of your payout that is greater than the cash value of your policy will be taxed as capital gains.Life settlement payouts are always higher than the cash surrender value.
For example, if you received a $185,000 payout for your policy, paid $100,000 in premiums over the life of the policy and had a cash surrender value of $20,000, the taxation could look like the following:
Others use the money to enjoy their retirement. Proceeds may be used to purchase a second home, take the vacation of a lifetime or pay off debt and medical bills. There is financial freedom in having disposable income and deciding how to spend it.
The State Regulations on Life Settlements Vary
The regulations governing the sale of life insurance policies differ between states. The various state regulations that are in place are designed to protect the policyholder, insurance companies and brokers, etc.
Life settlement transactions are regulated in 43 states which means the majority of the U.S. population is protected by regulations designed to make life settlements safe and easy to conduct. Puerto Rico also regulates the life settlement industry.
The fact that there have been remarkably few complaints against any company involved in the sale of a life settlement since 2012 is a testament to the efficacy of the regulatory framework in place.
The Upside of Selling Your Policy, Why People Sell
There are plenty of good reasons to sell a life insurance policy and the upside of sellingmay be the best decision for many seniors. They may choose to sell their policy because they’re feeling financial pressure resulting from medical and other bills or they’re simply looking to regain their financial footing.
Others just want to have the disposable income to enjoy themselves while they still can. Then again, many others decide to sell their life insurance policies because they can no longer afford nor want to continue paying high premiums.
In addition to rising inflation, paying excessively high life insurance premiums can unnecessarily accelerate the spend down of retirement savings.