How Cashing Out Your Life Insurance Can Help You Live Your Best Life?
If you are a retired empty nester with life insurance, perhaps your priorities have changed, and you would prefer to re-allocate the premium money you invested towards upgrading your lifestyle or pursuing a lifelong dream. Whatever the reason, selling your life insurance policy may be the perfect solution for you. Undoubtedly, taking this step is a big financial decision. So first consider why it would make sense to take the leap.
Here are five good reasons to sell your policy:
- Life Insurance is less important: The original purpose for buying the policy isn’t relevant anymore.
- Premiums are too high: Living on a fixed income makes the monthly premiums a restrictive expense that you would rather convert into extra cash.
- You want greater financial freedom to enjoy your golden years: Cashing in your policy would enable you to fully enjoy life such as taking trips you’ve always dreamed of and indulging in hobbies you always wanted to explore.
- You need to pay for unexpected medical expenses: If you have a chronic or terminal illness, you can use the funds to pay for unforeseen medical bills.
- Your policy has expired: If you allowed your insurance policy to lapse, instead of walking away with nothing, you will be able to receive a reasonable settlement.
Once you’ve determined that you want to move forward with your decision, you have various cash-out options to choose from. Here follows some choices to consider.
Surrendering A Policy
This is the quickest way to get a payout of any sort. Some of the most common reasons why people choose to surrender their life insurance are:
- They stopped paying their premiums and the policy has lapsed.
- The beneficiary of the policy has passed away.
- The beneficiary is now a grown adult that no longer needs financial protection.
- The policyholder wants to stop the beneficiary from receiving the benefit upon their death.
The first step is to surrender a policy is to notify your life insurance company and let them know what your intentions are. They will then send you forms to fill out. Once the policy is surrendered, the policyholder will receive a cash surrender value. This amount is generally less than the total amount of the policy because of assessed surrender charges. Know that when you surrender a policy for cash, the gains on the policy are subject to income tax.
The advantage to surrendering a policy is that it offers quick cash because turnaround time only takes a few days. That said, other options can yield a greater profit, such as a life settlement.
Life Settlement Solutions
Another popular alternative to cashing out a life insurance policy is selling your policy for a life settlement. A life settlement advisor can walk you through the process. The difference between a life
settlement and surrendering a policy is that you sell your life insurance policy to investors rather than simply cashing it out. This allows people to receive a significant amount more than the insurance company offers because a life settlement brokerage company shops around to get the best deal for you. Even though there are conditions that need to be met to be eligible for a life settlement, you could receive as much as three to four times the amount of the policy’s face value. That’s what makes it more lucrative compared to surrendering a policy.
Generally, you need to be at least 65 years old and have a life insurance policy worth at least $100,00 to qualify for a life settlement. The major drawback to applying for a life settlement is the length of time it takes to process the application. It may take anywhere from 90 to 120 days from the time the application is processed to closing the agreement. If you’re not in a pinch for cash, it’s worth the wait.
Senior Life Settlements
Life settlements are also known as senior life settlements and for good reason. Seniors can fund a greater quality of life, they can pay off debt, and they can finally start checking off their travel bucket list. Another appealing feature of a life settlement is there are customized options under the Life Settlement umbrella. They include:
- A traditional option: You sell your full insurance policy for a cash amount above the policy’s surrender value. There are no premiums or claims to benefit. You get cash for the policy.
- The retained benefit option: You wouldn’t pay premiums, you would keep a portion of your benefit, but you have no payments to make.
- The hybrid option: You would sell a portion of your life insurance policy where you would receive a guaranteed percentage of the benefit when the policy ends. You will have no premium payments or other obligations.
How to sell my life insurance policy
In a life settlement benefit, the amount you receive is generally more than the surrender value, but less than the benefit. The seller transfers ownership of the policy to the buyer in exchange for a cash payment.
There are three important things you should know when you choose to work with a life settlement advisor:
- Life insurance appraisals should be free.
- When selling your policy, there should be no hidden fees.
- The life insurance broker you are dealing with MUST be licensed.
- Get the best offer in writing.
First, you fill out an application. This can be done either online or by hand. Then you collect the necessary documents such as medical records, etc. After that, you wait for investors to review your application. Once you start receiving offers, you’ll eventually select the one that works best for you.
Opting for A Viatical Settlement
If you have decided to opt for a life settlement specifically to pay medical expenses, your best choice would be to opt for a viatical settlement. Both viatical and life settlement firms are responsible for transferring ownership from the policyholder’s third-party buyer. This is particularly advantageous for those that are ill.
Here are the key differences between a Life Settlement and Viatical Settlement:
- Medical Requirements: Because viatical settlements are only offered to those that are diagnosed as ill, a payout is normally used specifically for medical expenses, loan payoffs and end-of-life affairs. Life settlements are far less restricted.
- Tax Structure: Money from a life settlement is not always exempt from federal income tax. In most cases, viatical settlements are not taxable. Check with your accountant.
- Payout Amount: Viatical settlements usually have a larger payout than that of a life settlement because the policy holder’s life expectancy is shorter.
Now that you know the differences of a viatical settlement, what are the features that are exclusive to this specific type of settlement alone? Here they are:
- In a viatical settlement, the insured usually has a life expectancy of two years or less.
- The investor in a viatical settlement pays all future premiums left on the life insurance policy and becomes the beneficiary once the insured passes away.
- A viatical settlement can sometimes be risky because the rate of return is unknown, and it depends on when the seller dies.
Don’t lose your lifelong investment. Discover your policy’s value today.
Viatical Settlement Application
The process of attaining a viatical settlement is like a life settlement. First, a viatical settlement provider finds competing buyers for the policyholder who will facilitate the sale of the policy for a lump sum of cash. The lump-sum amount is generally greater than the surrender amount but less than the death benefit amount. Once the transaction is done, the third-party buyer will be responsible for maintaining the policy and its premiums.
Quality of Life Benefits
When someone is terminally ill, it enables them to obtain immediate cash to pay for their care and comfort during the final days of life. It can be a financial tool that enables family members to preserve estates and other assets—like a home, which they may not want to sell before they die.
Selling Term Life Insurance for Cash
People that carry term life insurance often wonder about selling their term life insurance policy. The good news is yes, it can be done. It’s just that the process isn’t as cut and dry. The main caveat is it needs to be converted to permanent life insurance first. Once that is done, a life settlement brokerage company can sell your life insurance if you are 65 years old or older and the policy exceeds $100,000. Also, some term life insurance policies allow you to add a conversion rider to term policies, which also makes it easier to convert to permanent insurance.
The Difference Between Term Life Insurance and Permanent Life Insurance
To better understand the importance of converting your term insurance to permanent life insurance, you must understand the difference. A term life insurance is limited in time (such as 10 or 20 years) meaning that if the policyholder dies within that time limit, the death benefit will be paid to the beneficiary. Additionally, you cannot borrow against it since term life policies do not build up cash value. Hence the lower premiums. By contrast, permanent life insurance (otherwise known as whole life insurance) has no time limit. It is more expensive, offers more investment options, and easily converts to a life settlement.
Term Life Insurance Cash Out Process
To find out more about your coverage convertibility, simply call your insurance provider. Once you find out that your policy can indeed be converted, there are plenty of life settlement advisors that can review your policy. Fill out the paperwork and gather the requested documents. Just know that if you have an unconverted term policy, you will get nothing once the policy expires. Convert it to a permanent life insurance policy and you can easily sell it through a life settlement advisor to get the cash you need.
How is a Life Settlement Taxed?
Taxation for a life settlement is contingent upon how much you have paid in insurance premiums as well as how much you receive for a settlement. It is generally treated as ordinary income or capital gains. If you are concerned about paying extra taxes, you may want to consult with your accountant before you commit to a life settlement.
Living your Best Life
As is true in so many aspects of life, things change. What was once important to you years ago, may no longer serve you today. Making changes that can enhance your quality of life in your senior years makes sense. So, if your current life insurance is no longer relevant to your present circumstances, call to get a free appraisal from a life settlement brokerage company. Just remember, you have options.
Frequently Asked Questions
What is a cash surrender value?
It is the amount of cash that you can withdraw if you surrender your life insurance policy and allow it to lapse. The amount can vary depending upon a myriad of factors.
Define the face value of a policy.
The face value of a policy is the death benefit. It is the primary factor in determining the monthly premiums that will be owed.
What is the cash value of a policy?
The cash value is the amount that would be paid if the policyholder opts to surrender their policy early.
What is an accelerated death benefit?
It refers to the rider that can be added to a life insurance policy so that the policyholder receives a portion of the death benefit while they are still alive.
What is a viatical settlement?
It is a life settlement accept that is tailored for those that are terminally or chronically ill.
Don’t lose your lifelong investment. Discover your policy’s value today.