A life settlement is the sale of an insurance policy, usually life insurance, to a third-party. In a life settlement transaction, insurance policies are usually sold for more than the cash value but less than the death benefit. A life settlement may be a good decision for some policyholders who no longer want or need the policy. But, for others, there are some drawbacks. First, let’s look at the benefits.
Pros of Life Settlement
You receive a cash benefit from the policy. The primary reason that you would sell a life insurance policy is to receive the cash from the sale. You may need the money to pay for more important expenses, like health care or large debts. If you have a large life insurance policy, you may be able to sell part of the policy to a life settlement company and keep the other part for yourself. Check with your insurance company to see if there are any minimum policy amount restrictions.
You can receive relief from expensive premium payments. As you get older, the monthly cost of life insurance tends to increase. If you are no longer able to afford your insurance premiums, you could take a life insurance settlement, receive the cash benefit, and no longer be responsible for monthly payments.
The policy has or is about to lapse. A life insurance policy lapses when youstop making payments. A life settlement company may offer you some cashfor the policy and keep it from being cancelled by resuming payments for you.You can receive a cash benefit where you otherwise would not have receivedanything because the policy would have cancelled.
Cons of Life Settlement
Your family members will not receive a death benefit from your life insurance.Once you’ve surrendered the life insurance policy, the life settlement companygains the death benefit. If you don’t have other savings or life insurance tocover your debts and burial expenses, your family may have to pay thoseexpenses from their pockets.
The life settlement industry may be unregulated in your state. That meanslife settlement companies and brokers have few rules to follow regarding disclosures. Your state’s Insurance Department may not be able to provide you with assistance if you have a complaint about a life settlement company or broker.
There may be tax implications. Depending on the amount of premiums you’ve already paid, your settlement amount may be subject to income taxes. Any amount you receive over the cash surrender value is subject to taxation. This is a significant consideration, as you may be sacrificing the potential tax-free benefit payable upon death. Depending on your other income, the settlement could push you into another tax bracket, increasing the amount of income taxes you owe. Contact a tax professional for more information about how a life settlement would affect your taxes.
You lose any benefits associated with the original policy including the ability to borrow against the policy, cash out the policy, use the policy as collateral to secure a loan, or leave a tax free death benefit to your loved ones.
You may be contacted periodically by the life settlement company to check on your health status. The life insurance settlement company may require you to sign a waiver with your doctor or hospital allowing them to release your medical information. Other third parties including lenders and investors may have access to that information.
Life settlement agents don’t have to be trained or licensed in certain states. There are no federal laws regulating life settlements. Not all states have laws regarding life settlement, so you may be left with little recourse if a life settlement company takes unfair advantage of you. To find out whether your state has laws governing life settlement, check with your state’s insurance department.
Should You Sell Your Policy?
If you’re considering selling your life insurance policy to a life settlement company, make sure you examine both the pros and cons of the decision. If you get rid of your life insurance, you might receive a cash benefit today, but make sure your family’s financial needs will be taken care of when you’re no longer here.