In some circumstances, primarily for seniors, a life insurance policy may no longer be needed or desired. Before you cash out of your policy, you should investigate life settlements, selling your policy to a third party for more than the policy’s cash surrender value.
Why would you consider selling your policy?
- You might decide that changes in your life circumstances — such as the death of or divorce from a spouse or your children being grown and no longer need to be provided for – have gotten you to look closely at your life insurance, finding that your loved ones may no longer need the benefits of your life insurance policy after you’re gone.
- Or, if you’re facing mounting bills from living expenses or an illness, you might find yourself unable to pay those pricey premiums, or simply need cash.
- You might have gotten a policy for your business, and that circumstance has changed as well if you sold your business and no longer need to protect it.
- Some policy owners may also learn that their life insurance company has switched ownership or gone out of business, with their policy hovering, awaiting for next steps.
The big question for you in these and other circumstances regarding your life insurance policy is: do I have this option and is this right for my financial situation?
I’ve met with many clients about life insurance policy issues, as they stand at crossroads wondering which path to take. One client faced this very same dilemma: he initially considered simply letting the policy go and considering it a ‘win’ to eliminate expensive premium payments. But once we looked at his policy, we saw that he had a convertibility clause option, sold the policy via a life settlement, and he received $60,000.
It can be very worth it to explore life settlements with your financial advisor, since – as you know – life insurance policies are quite complicated and multi-faceted, with lots of fine print to understand, and mistakes to avoid.
What is a Life Settlement?
In a life settlement, the owner of a life insurance policy sells his or her policy to an investor in exchange for a lump sum payment, which is generally less than the death benefit on the policy, but more than its cash surrender value. The life insurance policy then becomes, at present, a financial asset that can provide another retirement income source for seniors whose life situations have changed, or who could use the money now.
How life settlements work
A life insurance policy can be sold to an investor for cash, and the investor becomes the beneficiary of the policy, while taking on the responsibility of paying all future premiums. You are, in essence, handing your policy to them.
Let’s say you have a life insurance policy that would pay $1 million upon your death. Looking at your policy, you see that the cash surrender value is $100,000. An investor may be willing to pay you $200,000, $250,000, or any increased amount to take on your policy. You get the $200,000 or so now, and the investor gets the $1 million upon your death, as the beneficiary of your policy.
Keep in mind that not all policies are open to life settlement plans. According to the SEC, life insurance policies that qualify for life settlements must be a whole life, universal life, or a term life policy that is convertible into one of those types of permanent policies. You may also be eligible for this option if you hold a term life policy that converts to a universal policy.
It’s important to talk to an experienced financial advisor to truly understand the ins and outs of your life insurance policy to determine your eligibility. While you might have understood fully the type of policy you have when you acquired it, many years might have gone by, and you may benefit from a financial planner’s ‘fresh eyes’ on your policy to help determine your options.
Life settlements may be handled through your financial advisor, who can connect you with a life settlement broker who charges a commission. Life settlement brokers might also be life insurance agents or securities brokers, and depending upon the state in which you live, life settlement brokers doing business in your state may be licensed. Your financial advisor is a good guide to assessing these brokers.
Fees and Details
Your timing would be far more ideal in seeking a life settlement now than it would have been in the early days of these types of policy options, since – back then – unethical brokers would often charge hefty fees (sometimes upward of 50%) for these policy sales. But improved regulations have established more favorable, protective guidelines for these types of transactions today.
Still, you will have to face a commission of some degree, which again your financial advisor can help you understand and navigate.
Know also that the amount offered in a Life Settlement takes into account the insured’s age, health and life expectancy to configure that amount. You would provide to the life settlement broker your authorization to release your medical records for this important step. After an assessment of your health and configured life expectancy [which, understandably, is more attractive to a company if you’re likely to be around for 10 years or less, depending on actuarial tables,] the broker would forward your information to one or more life settlement provider companies, which may be regulated by your state. These providers bid on your application, giving you perhaps multiple options of Life Settlement amounts.
Obviously, a stronger insurance company is much more desirable than a weaker insurance company, so assessments in that regard will also figure into your life settlement transaction decisions, with your financial planner’s assistance.
Your financial advisor can further clarify the details of seeking a life settlement, and I can certainly answer any questions you might have as you assess the potential benefits, depending upon your life circumstances. One thing you may learn in your discussions with me is how a life settlement could add to your retirement nest egg while also helping you spend down your assets to help you qualify for Medicaid, if applicable.
And then there is the important consideration of whether or not it’s not the right move for you. Some families may be able to afford to keep a life insurance policy intact, so it may not always be the wisest decision to dive into a Life Settlement.
As you can see, there is a lot to discuss personally on this topic, and I welcome your call.
For more information on life settlement, including a discussion of split beneficiaries in which you may not have to give up your whole death benefit, listen to my podcast here.