Sunday December 16, 2018
How to Receive Cash for Your Life Insurance Policy
I have a life insurance policy that I have been making payments on for years. I really do not need the policy anymore and I have been thinking about letting it lapse, but recently heard that I can sell it for a lump sum. What can you tell me about this?
Selling a life insurance policy- a transaction known as a "life settlement"-has become a popular option in recent years among retirees who no longer want or need the policy or who are looking for some extra cash.
A life settlement is the sale of an existing life insurance policy to a third party company for cash. Life settlements are typically best suited for people over age 65 who own a policy with a face value of $100,000 or more or someone younger who has experienced a significant change in health.
Historically, if an owner of a life insurance policy decided the policy was no longer needed, he or she would either let the policy lapse or turn it in for a meager cash surrender value. But now, with the life settlement option, life insurance owners can actually sell the policy for more than the cash surrender value, but less than its net death benefit. Once the policy is sold, the life settlement company then becomes the new owner of the policy, pays the future premiums and collects the death benefit.
The amount of money you can expect to receive will depend on your age, health, life expectancy, the type of insurance policy, the premium costs and the cash value of your policy. You may be able to receive four to eight times more than the policy cash surrender value.
If you are interested in a life settlement here are some things you should know:
Shop around: To ensure you get the best price for your policy, obtain quotes from several companies. Also, find out how much you will have to pay for broker and transaction fees.
To search for providers or brokers, the Life Insurance Settlement Association provides a directory at LISA.org.
Be prudent: Life settlements are regulated in most states. Check with your state insurance commissioner to see if the life settlement company you are interested in is properly licensed (see NAIC.org for contact information).
Protect your privacy: When you sell your life insurance policy, you will have to sign a waiver authorizing the release of medical and other personal information so that the buyer can determine how much to offer for your policy. Before accepting any offer, make sure that the company has procedures in place to protect the confidentiality of your information.
Understand the tax implications: The Tax Cuts and Jobs Act recently updated the tax treatment of a life settlement. It is now treated the same as the surrender of a policy back to the insurance company. This can be complicated, so be sure to consult a tax advisor.
If you want to keep your life insurance policy but could use some extra cash, you may have some other options. For example, some life settlement companies may allow you to keep part of the policy's death benefit while eliminating your premium obligations. You can also ask your life insurer if you can borrow against your policy. If you are in poor health, see if you are eligible for accelerated death benefits. You should also find out if you are able to convert the cash value of your policy into an immediate annuity (through a 1035 Exchange). This option would provide you with fixed payments for a set number of years or for the rest of your life.
Savvy Living is written by Jim Miller, a regular contributor to the NBC Today Show and author of "The Savvy Living” book. Any links in this article are offered as a service and there is no endorsement of any product. These articles are offered as a helpful and informative service to our friends and may not always reflect this organization’s official position on some topics. Jim invites you to send your senior questions to: Savvy Living, P.O. Box 5443, Norman, OK 73070.
Published March 2, 2018
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