There may come a day when you really don’t need or want that life insurance policy you’ve been paying for. Maybe your spouse has passed away and your grown children don’t need to be taken care of. Could be you need cash or you simply can’t keep making premium payments.
In the past, the answer was often to simply quit paying the premiums. Nowadays, though, you have another alternative: life settlement. With this option, you sell your policy for more than its cash surrender value but less than the net death benefit.
Whoever you sell to is basically taking on a financial interest in your death. Besides paying you a lump cash sum, the buyer also takes over premium payments. When you die, the buyer receives the death benefit.
Using your medical records, the buyer will estimate your longevity. If you die sooner rather than later, the buyer no longer has to pay premiums and receives your benefit. On the other hand, if you live longer than estimated, the buyer may end up getting less out of the deal than they bargained for.
Pros of Selling Your Policy
- Access to cash to help with finances during retirement.
- No longer have to pay your monthly premiums.
Cons of Selling Your Policy
- You’ll have to cover high transaction costs, including commissions as high as 30%.
- You may be taxed on the cash you receive.
- If you’re on Medicaid you may no longer qualify.
- You may be pressured with aggressive sales tactics to take an offer that’s not in your best interest.
Despite some possible negatives, a life settlement can still be a good option. If you decide to enter into a life settlement there are steps you can take to protect yourself
- Shop around. Don’t take the first offer you get, because you could receive a higher bid if your broker, or you, looks around.
- Don’t be pressured into taking an offer you may not want. If a potential buyer is too aggressive step away and look elsewhere.
- Make sure the broker or provider are licensed in your state. You can find out using the National Association of Insurance Commissioners (NAIC) tool here.
- Before accepting an offer carefully read the agreement to verify that the information you provide, including medical records, is safeguarded and kept confidential.
- Ask your broker or financial adviser who will receive a commission and how the commissions are calculated.
- Check with a tax professional to understand any tax implications before you go through with the transaction.
If you’re in a position where you no longer want your life insurance policy, consider entering into a life settlement. Find out more from your state commissioner, and be sure to log any complaints with your commissioner should an issue arise.