Life Settlement Options
A life insurance policy can be an expensive financial asset to own. Premiums can add up, especially for many seniors who live on a fixed income. Additionally, insurance companies can raise the cost of premiums over time as the cost of coverage increases. There also could be other reasons for you to sell your life insurance policy, such as medical care, supporting family members, loss of dependents, or quality of life enhancements.
For many people, selling their life insurance (a process called a life settlement) is a viable option.
At Cedar Life Settlements, we help seniors make the right decisions when it comes to choosing a life settlement or a life settlement alternative. In the article below, we will describe what is options are available and their respective pros & cons.
Understanding Life Settlement & Alternatives
There are five different life settlement options which may be the right fit for your financial situation. You can click on each of these options below to learn more.
Many seniors decide to surrender their life insurance policy to their current insurer, effectively selling it back. By doing so, they are giving up their insurance policy for a lump sum payment. The premium payments stop along with any benefits payable to beneficiaries in case of death.
Although it may appear straightforward if you need immediate cash, there are likely better options available for you. For example, a life settlement’s payout is worth 3 to 4 times more than surrendering your life policy.
If you only need a portion of your life settlement payout and would prefer to keep your death benefit in place, you can also take out a loan against your policy, or make a withdrawal:
- Withdrawal: This process allows you to take a limited amount of cash out from your life insurance policy. From a tax perspective, any cash withdrawal up to your policy tax basis is generally non-taxable. However, reading the fine print is important since some traditional whole life policies reduce the death benefit by a greater amount that what you withdraw.
- Loan: Many insurance companies offer low-interest loans where you can borrow money against your own life insurance policy. Although the terms of these loans may seem too good to be true, keep in mind that the loan plus interest will be deducted from the death benefit.
If you are affected by a serious illness, insurance companies may suggest an ADB (Accelerated Death Benefit) as an add-on to your life insurance policy (also called a rider). It allows policyholders access to their life insurance benefit before they die.
Since you would receive the funds before death, insurance companies would not offer you the whole payout, instead offering much less. Insurance companies such as AIG only offer 50% or up to $250,000, which could be a big hit to your financials or your family’s if your policy is worth much more.
Keep in mind that your premiums may also increase if you add a ADB rider to your life insurance policy.
A life settlement is the sale of your life insurance policy to a third party. After its sale, the premium payments are suspended along with the death benefits. The payout, however, is generally much higher than surrendering your life policy. Most policies (universal life, joint survivorship, term policy…) qualify as long as the death benefit is above $100,000 and you are 65 years old.
A life settlement broker such as Cedar Life Settlement can match you with multiple investors that seek out policies just like yours, allowing for competition to get you the best possible deal.
A viatical settlement works very similarly to a life settlement. The process also involves the sale of your life insurance policy for a lump sum of cash.
The main difference is that a viatical settlement is designed for terminally ill or chronically ill policy holders as a way to alleviate the burden of medical care.
Viatical settlements allow someone to take advantage of their life insurance policy to cover medical costs, get rid of expensive insurance premiums, and be financially comfortable.
Life settlements may have a meaningful impact on your tax situation. Please read our dedicated page to life settlement tax implications to learn more.
Disclaimer: Cedar Life Settlements does not provide tax nor legal advice. You may need to consult a tax professional.
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