Should I Sell My Life Insurance Policy?
Selling your life insurance policy can financially protect your family now and in the future. This type of transaction is called a life settlement (also known as viatical settlement if the policyholder has a serious illness). Recent changes in regulations have made them very popular since they provide you with a cash lump sum and waive any future premium payments. In this article, we will detail options available to you, and assess whether a life settlement is the right fit.
Main Reasons for Selling a Policy
First, it is important to consider the reasons for selling a life insurance policy. From our experience in the industry, the five most common reasons are the following:
> Rising cost of premiums
On average, a life insurance premium increases between 8% and 10% every year, depending on the nature of the policy and the age of the insured individual. While it remains reasonable for younger folks, the increase can be problematic for seniors who have a fixed income during retirement. The main reason for this increase is that as individuals get older, their life expectancy Some policies offer “fixed premiums” where the insurance company averages the cost of premiums throughout the entire life. This translates into higher premiums when you are younger and higher ones as you get older. However, after a life insurance settlement process, the investor will be responsible for all future premium payments. This can lift a significant financial burden from the policyholder’s shoulders
> Medical Cost Increase
The cost of healthcare is seeing a significant increase year over year in both health insurance premiums and treatments. According to the Peter G. Peterson Foundation, the cost of healthcare averaged $11,000 per person in the US, which is one of the highest in the world. It should go up to $18,000 by 2028 according to the Centers for Medicare and Medicaid Services.
On the premium side, the average annual premium for employer-based health insurance increased by 5% in 2018 compared to the previous year, according to the National Conference of State Legislatures. This has been a steady trend for many years. In 2018, the average premium cost rose by 3% compared to 2015.
There is a variety of reasons behind this increased including the addition of new healthcare technology that provide patients with better care but are also more expensive. Additionally, the complexity of the healthcare system and hospitals gaining monopoly status in some specific areas can lead to higher prices.
It can be daunting task to plan for high and unexpected healthcare cost. For many people, a life insurance settlement has provided some financial cushion in this type of situation.
> “Aging in Place” home renovations
Most seniors want to stay at home and selling their life insurance policy help with renovations and updates that can improve their day-to-day lives while making them more comfortable. According to Nerdwallet, seniors usually install upgrades such as:
- Wider doorways and doors
- Bathroom grab bars
- Slip-Resistant floors
- Lower kitchen counter-tops
- Wheelchair ramp
- Chair lift or elevator
> Supporting Family Members
This is a common occurrence for people to sell their life insurance policy to help family members with their medical cost, down payments on a property or college tuition for example. With rising cost in healthcare and education, selling a life policy can be an adequate financial support.
> Retirement Enhancements
Finally, many folks and their family are financially stable and do not have significant expenses or debt. However, they may want to enjoy their retirement traveling, moving to a different area or simply improving their daily comfort. An influx of cash can translate into a happier retirement and fun experiences.
Things to Consider
Every person is in a different financial situation and there are a few important things to think about before going forward with selling a life insurance policy.
A life settlement takes a certain amount of time to be processed, generally between 90 and 120 days. Your life insurance policy needs to be assessed by a multitude of investors. This means collecting information such as your policy details, your general health and calculating their return on investment. It is recommended to not rush this step so policyholders can receive the best offers possible.
> Your Financial Situation
Although a life settlement provide policyholders with a cash lump sum, it would also waive the policy’s death benefit, meaning that your beneficiary will not receive any funds upon your death. This type of conversations can be difficult to have with relatives but this an important consequence to consider.
> The Value of your Policy
Obviously, this is a crucial information for anyone looking to sell their policy. Seniors have owned their policy for many years and they want to make sure they can get a reasonable price for it. It is not easy to find a life settlement calculator on the internet without having your personal information away so we created one, available here.
The final bids for your policy will be based on three main factors: Death Benefit, Future Premiums & Life Expectancy.
What are my options?
Typically, there are four different options available to you when you own a life insurance policy. Some may be a better choice than another based on your financial health and goals.
Surrender the life policy to your insurance company
Insurance companies are obviously encouraging policyholders to surrender their policy instead of opting for a life settlement. This allows them to offer them a minimal amount of money. Generally speaking, a life settlement is worth 3 to 4 times more than surrendering a policy.
Loans and withdrawals
Most insurance companies allow people to withdraw funds from a life insurance policy to a certain limit. However, it is important to read the fine print since withdrawals can reduce the death benefit significantly.
Low interest loans are also a viable option. Keep in mind that the principal and interest must be paid back in order to keep the death benefit intact.
Accelerated Death Benefit
Also called a policy “rider”, an ADB allows individuals to access their death benefit earlier. They are usually limited in dollar amount of percentage of death benefit. They can also increase your premium payment so it is important to read the conditions associated with an Accelerated Death Benefit.
A life settlement is the sale of your life insurance policy to investors. A life settlement broker such as Cedar Life Settlements can help you shop and select the best offer available on the market.
Read more about your options on our detailed page here.
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