Life Settlements: Should You Sell Your Life Insurance

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Life Settlements

Are you facing life insurance premium payments that you can no longer afford? Perhaps you don’t even need your life insurance anymore either? Even if you do, you can still decide to sell life insurance policy and get a more affordable one for your current needs. Either way, you might want to consider a life settlement which simply means selling a life insurance policy for cash to a third party.

Possible Reasons for Considering to Sell Life Insurance Policy 

There are many situations when people might realize they no longer need their permanent life insurance policy and so they opt for a life settlement. This essentially means selling your policy to a life settlement company either directly or through a broker. Depending on a few different factors, you’ll then get a sum that’s greater than your policy’s surrender value. That’s the amount you would get for just canceling your life insurance policy but with life settlements, you’re guaranteed more.

It’s worth going through some of the reasons that might drive you to sell your life insurance, as listed below: 

  • Financial situation
  • No need for a death benefit payout
  • Emergencies such as terminal illness

Financial situation

If you can no longer deal with the premium payments then of course a life settlement is a possible option. It’s worth remembering though that you can only sell a whole life insurance policy. Therefore, if you have a term life policy then you’ll have to convert it to a permanent life insurance. Within that group, you have the option of converting to whole or universal life insurance.

Another point to note is that permanent life insurance builds up a cash value over time. This becomes a pot of money that you can withdraw from and even take out a loan against. These are possible options for people to consider before they sell their life insurance and go for a life settlement. Either way, you’ll want to first talk to your life insurance company to determine the cash value of your policy and what your options are to access your policy’s cash. 

No need for a death-benefit payout

Life situations often change and you might realize that your dependents have either moved on or no longer need a payout after you’ve gone. For example, perhaps you took out your permanent life insurance to cover your mortgage and school fees after you’ve gone but now they’ve all been paid? Regardless, there might also be other things you can do with your inheritance to cover your dependents’ needs. In those cases, perhaps talk to a family lawyer before selling your life insurance policy for cash.

Emergencies such as terminal illness

A case of a sudden chronic or terminal illness means a spike in medical expenses. You might therefore need the lump sum from a life settlement. In fact, it’s because of this that we also have what’s known as a viatical life settlement. Basically, to qualify for a life settlement, you need to be older than 70. Nevertheless, you can still do a life settlement if you’re younger and have a terminal illness. That’s a viatical life settlement which again, involves selling a life insurance policy in the same manner.

Pros and Cons of Deciding to Sell Life Insurance Policy 

  • Lump-sum versus a loss of death benefit
  • Potential tax and loss of benefits
  • Easy cash value versus finding the right buyer 

Lump-sum versus a loss of death benefit

The biggest advantage of a life settlement is that you receive a cash value that’s greater than any surrender value you would get. That’s the amount you get if you simply cancel your life insurance policy. Nevertheless, don’t forget that you lose your death benefit. There’s no right or wrong here and it depends on your personal circumstances and what, if any, dependents you have. 

Potential tax and loss of benefits

You should always talk to your life insurance company before you decide to do a life settlement. That’s because some life insurance policies have benefits such as home nursing care attached to them. Therefore, make sure that you’re happy to give those up with your life settlement. 

Another point to note is that you might be taxed. Although, it’s good to know that the whole lump sum won’t be taxed but only a part of it. Again, your life insurance company can recommend a tax adviser so that you can get a better idea of the whole picture. 

Easy cash value versus finding the right buyer

Whilst it can look appealing to get a lump sum, you’ll need to shop around for the right life settlement company. Then again, you can also work through a broker to help you get the best deal. Either way, life settlement companies don’t offer the same level of payout as each other. Moreover, some are more specialized for certain types of life insurance policies. You’ll therefore need to do a bit of research to make sure you’re happy with the final outcome. 

Final Verdict of Whether to Sell Life Insurance Policy 

There’s no black and white answer because each situation is different. Perhaps one of the most common reasons for doing a life settlement is when people’s health has worsened such that their life expectancy has decreased, alongside increasing medical expenses. Having said that, it’s a very personal decision so you’ll need to weigh up the pros of receiving a lump sum right now versus losing a death benefit and paying a tax bill. Either way, talk to your life insurance company as a starting point and get an initial sense of the value of your policy. Then, do your research and get as much information as to make the decision that’s right for you and your family before you opt to sell life insurance policy.