Life Settlement Basics

Life Settlement Basics

Life Settlement Basics to Address Financial Needs

Your life insurance may have value beyond just the death benefit. Indeed, if you have a certain type of life insurance policy, you may be able to sell it for money that you can use now. The transaction of selling your life insurance policy rather than having the death benefit paid out is known as life settlement. 

How Does a Life Settlement work?

A life settlement involves selling your policy for less than the death benefit but for more than the cash surrender value. A third party will purchase your policy for a lump sum payment. That buyer then becomes the owner and beneficiary of the policy. The buyer will pay the premiums moving forward and the seller will receive immediate cash for the policy.

Is Selling My Life Insurance Policy a Smart Move?

If you are in financial need, speak with a trusted financial advisor about the pros and cons of selling your life insurance policy. The decision to do so may be advantageous for certain individuals. For others, it may not fit well with overall financial goals and plans for loved ones. The questions below can help you begin to determine if selling your life insurance policy is right for you.
  • Can I comfortably continue to pay the premium?
  • Do I still need a life insurance policy for my family?
  • Am I in a financial emergency and need cash?
  • Is my term policy set to expire?

Your answers to these questions can help you to begin ascertaining whether selling your policy is in your best interest. However, it’s always advisable that you consult a trusted financial advisor before making up your mind. 

Am I Eligible to Sell My Life Insurance? 

If you’re thinking of selling your policy to address current or future financial needs, you’ll need to be eligible. Those who are eligible to sell their life insurance policy often need to meet the following requirements:

  • Must be at least 70 years old
  • The policy must have a value of at least $50,000
  • You must have a universal, convertible term, or variable policy
  • You must be the owner of the policy for several years before selling

Benefits of Life Settlement

Selling your life insurance policy may sound risky, but for many people, it proves advantageous. Benefits of selling a policy you no longer need or want include the following:

  • Access to lump-sum payment immediately
  • Ability to invest the money you receive however you’d like 
  • Freedom from monthly premium payments 
  • Greater sale price than surrendering your policy

Risks Associated with Selling Life Insurance

All financial decisions have some risk, and selling your life insurance is no different. Potential risks or disadvantages of selling your policy early include the following:

  • Beneficiaries do not receive the death benefit
  • A lump-sum payment may make you ineligible for Medicaid if you exceed the program’s asset limit
  • If you have outstanding debt, creditors may claim the proceeds
  • Taxes and fees may reduce the amount of money you receive

Example of Life Settlement for Financial Needs 

Consider a 74-year-old individual who has a $2 million term policy. The policy offers the option to convert (for a limited time) to a whole life policy. However, the policy owner no longer needs the policy, but if they allow it to lapse, they receive nothing after years of premium payments. 

Instead, the policy owner opts to have his financial advisor negotiate a sale of the policy. The seller earns $600,000, and the buyer acquires all rights and ownership of the policy. The seller now has $600,000 for financial needs, or to invest as they wish. For this individual, selling the policy made sense. 

Always Talk with Your Financial Advisor

Before making any significant financial decisions including those involving life insurance, be sure to consult your financial advisors. There are potential tax implications to all financial decisions, which you need to understand. Likewise, you’ll want to make sure that any financial decision you’re considering lines up with your overall financial goals and plans. 

At Finley Davis, we are here to help you make financial decisions that are in your best interest and align with your overall goals. To schedule an appointment with Finley Davis, contact us today