When you buy a permanent life insurance policy, you are committing to pay the premiums for the rest of your life. If you find yourself in a position where you can’t afford your premiums or where you don’t require life insurance anymore, however, you may be able to sell your policy. Here is a quick overview of the process:
Life settlements are usually designed for people who are over the age of 65. However, information from the Life Insurance Settlement Association (LISA) shows that people who are younger than that may also be able to participate if they have a qualifying medical condition. Although there are no restrictions on the size of the policy that can be sold, the ones that are the most sought after usually have death benefits of $100,000 or more.
In most cases, life settlements are purchased by banks, insurance companies, or other institutional investors. In some instances, however, individual investors may also purchase them outright.
It is important not to confuse life settlements with viatical settlements. Viatical settlements are geared toward terminally ill patients who have a life expectancy of fewer than two years. There is also the option to surrender your life insurance policy back to the insurance company, effectively ending the coverage in exchange for a percentage of the cash value of the plan, assuming that the plan has any value.
Understanding Life Settlements
There are two basic approaches if you think maybe I should sell my life insurance policy. The first option is to use a broker. Brokers help their clients get the best possible price by actively seeking bids. This is the most common method for selling a policy. Alternatively, you could sell your policy to a provider directly, skipping over the broker entirely.
After you decide on whether you want to use a broker or a provider, the process begins by sharing a detailed analysis of your life insurance policy and your medical history.
If you have decided to hire a broker, they will then try to find a buyer for your policy. Buyers will determine how much to pay based on your overall life expectancy and the information that is contained in your medical records.
If you get an offer that is to your liking, you can go forward with the sale. The buyer will then own your policy and will take over paying the monthly premiums. Keep in mind that your policy can always be resold to another buyer. In that case, the new buyer would then become responsible for paying your premiums.
Once your policy has been sold, your only responsibility is to periodically let the buyer know that you are still living. For instance, you may receive a postcard in the mail every so often from the buyer checking in on you. You will usually need to add your signature to the card and send it back to the buyer to confirm that you are still alive. The details of how these notifications are handled can be arranged at the time that you sell your policy.
After you die, the death benefit is then paid out to the owner of the policy.
How Much Money Can You Get For A Life Settlement?
There are a lot of factors that go into determining the amount of a life settlement including the payout value of your life insurance policy and your overall life expectancy. The buyer will also need to take into account the ongoing expense of paying your premiums while you are still alive.
After you get your life settlement, you may need to pay taxes on a portion of the money.
The Downsides Of Life Settlements
Although you can bring in extra money by selling your life insurance policy, the process is not without its downsides. Here are some of the primary disadvantages of life settlements:
- Coming up with a fair price for your life insurance policy can be challenging.
- The commissions associated with the sale can be as high as 30%, taking a major chunk out of your settlement.
- Life settlements are usually taxed. Alternatively, death benefits associated with life insurance policies are distributed to your beneficiaries without being taxed.
- Life insurance is designed to provide your loved ones with financial security after your death. If you sell your policy, they no longer have a safety net to rely on after you are gone.
- A life settlement may prevent you from qualifying for public assistance.
Important Questions To Ask before Agreeing To A Life Settlement
Life settlements can be a good way to get extra cash. However, before you jump in and sell your life insurance policy, it is important to consider the following questions:
- *Do you require the coverage that a life insurance plan provides? If you have dependents who count on you for their financial well-being or if you can easily afford the monthly premiums, you should consider keeping your life insurance plan rather than selling it.
- Can you make your premium more affordable? If you are struggling to pay your premium, you may be able to make it more affordable by opting for a lower death benefit or by taking out a loan against your life insurance policy.
- Is your broker or provider trustworthy? Only work with brokers who are properly licensed. The buyer or broker should be more than happy to answer any questions that you have and to help you through the process, making sure that you understand all of the steps along the way.
Avoiding Common Pitfalls When Selling A Life Insurance Policy
If you decide to go through with selling your life insurance policy, use the following tips to get the most money possible:
- Usually, you will get a better deal by finding a broker on your own rather than by using a broker that is actively soliciting new clients.
- Consider working with a broker rather than a single seller. A broker can help you get multiple offers, giving you a far better idea of the true value of your policy.
- Learn as much about your broker as you can before you agree to hire them. You should be able to find out whether or not they have any outstanding complaints by contacting the insurance department of your state.
Keep in mind, as well that you are never obligated to sell your policy, even if someone bids on it.
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