Most people consider life insurance policies to have a singular purpose – to pay out the policy’s death benefits to the loved ones or beneficiaries of the policyholder. But a life insurance policy can be used for other purposes as well, before the death of the insured – such as payment for medical expenses or debts. Selling your life insurance policy is an option that not everyone is aware of – but it is gaining in popularity in recent times. You may have come across the terms ‘reverse life insurance’ or ‘life settlements’ – well, they are your options for selling your life insurance policy for cash value.
Reverse Life Insurance – What is it?
While Reverse Life Insurance and Life Settlements are often used interchangeably – they are not the same thing. While both involve trading your death benefits for cash, reverse life insurance covers a lot more. It is an umbrella term that encompasses the different ways policyholders can exchange their life insurance policy for cash – and life settlement also falls under the category of reverse life insurance.
Reverse Life Insurance – Benefits
Reverse life insurance can have many benefits. The most important one is that it can provide the policyholder with cash in their savings account without disrupting their equity or investments. It is an effective way for the policyholder to turn their policy into an asset that they can use or invest. There are many reasons why a policy owner might choose to reverse their life insurance policy. Selling the policy means that the policyholder receives a portion of their death benefits or a set amount of cash.
The policyholder may choose to sell their life insurance policy for the following reasons:
Their financial situation is tough – economic hardships can prompt a policyholder to reverse their insurance policy for cash that they might use for bills and other expenses.
They no longer want to keep up with life insurance premium payments – some policyholders might think of their life insurance premiums as a burden that they no longer want to keep. Selling their policy for a lump sum is the better solution for them rather than letting their insurance lapse.
Unexpected life events – the policyholder could be experiencing an unexpected life event – such as a divorce, a terminal illness, or a chronic illness, that would make a cash payout the better alternative than a life insurance policy.
They no longer need the life insurance coverage – if the policyholder may have enough savings and investments, or no beneficiaries/ family members who need the death benefits, which would make reverse life insurance a sensible option.
They may need a capital infusion or capital gains – many people view their insurance policy as a source of cash rather than a contingency plan, so the policyholder may sell their policy because they need capital for a business venture.
Tax purposes – under tax laws, life insurance receives exemption from taxes, but when a policyholder is over-insured, they will need to pay an estate tax if their estate value exceeds a certain amount. Reverse life insurance can help them avoid any unnecessary tax treatment, and even lead to tax benefits.
Reverse Life Insurance – Options
As we have covered, reverse life insurance is an umbrella term that covers many options and strategies. Among the numerous options available, viatical settlements and life settlements can net you the maximum cash – but they are not the only options available to you. You can choose to take out a loan against your life insurance policy, convert your policy to a long-term care account, choose the payout from your accelerated death benefit rider, or even surrender your permanent life insurance to your life insurance company.
To understand what the best option for you is – talk to your insurance agent about reverse life insurance and various insurance products.
If the policy owner has been diagnosed with a terminal illness or a chronic illness, they can sell their life insurance policy to a third party or a financial institution for a cash settlement – and this option is known as a viatical settlement. The third party then becomes the beneficiary of the policy’s death benefits, and the policyholder receives a cash amount that is less than the face value of their policy. You can choose a viatical settlement if your life expectancy is less than two years – otherwise, the settlement will be treated as taxable income, and you will pay an income tax on it.
A life settlement means selling your life insurance policy to a third party for a lump sum of cash. The third party then becomes the beneficiary of your insurance policy’s death benefits. You can sell your life insurance policy for a life settlement only if you achieve eligibility by meeting the following conditions:
You are over 65 years old
Your insurance policy has a face value of $50,000 or more
Policy Loan Against Cash Value
If your permanent life insurance has a significant cash value, then you can take out a policy loan against it. The most common practice for these loans is your insurer lending you the cash. These loans will accumulate interest, but the interest rates are competitive. The loan amount plus the interest will be deducted from your death benefit when you pass.
Withdraw Accumulated Cash Value
Depending on your life insurance company and your life insurance policy, you may be able to withdraw a portion or the entirety of the cash value of your policy. This is not a loan – so the amount you withdraw will not accumulate interest, nor do you have to repay it after a period of time. As a trade-off, your beneficiaries or loved ones will receive a lower death benefit.
Convert Policy to a Long-Term Care Account
You can sell your life insurance policy for a life settlement, then deposit the cash in an account and mark it for long-term care. This is the process for converting your insurance to a long-term care account or a Medicaid life settlement.
Accelerated Death Benefit
An accelerated death benefit rider is an add-on to your life insurance policy that allows you to receive your death benefits while you are still alive. It is subject to certain conditions:
You have a terminal illness and a life span of less than two years
You have a chronic illness and are unable to perform two or more activities of daily living (ADLs)
With an accelerated death benefit, you can take care of your medical expenses. And as the proceeds from your life insurance policy, the cash you receive is usually tax-free. But accelerated death benefits are not a substitute for health insurance.
Surrender Life Insurance Policy to Insurer
You have the option of surrendering your life insurance policy back to your insurer and receiving a cash payout in surrender value. If you decide to surrender your policy, your insurer will terminate your policy – you will no longer have to make insurance premium payments. It is not an option preferred by many, since the cash surrender value of life insurance policies is very low. Choosing a viatical settlement or a life settlement would be the more lucrative option.
Don’t lose your lifelong investment. Discover your policy’s value today.
Should I sell my life insurance policy for cash?
It depends on your situation as well as the reverse life insurance you choose. You may not receive the entire face value of your policy, and the cash you receive may be subject to tax laws and tax treatment.
Is reverse life insurance regulated?
Yes, there are regulations in place regarding reverse life insurance and life settlements in 48 states.
Which insurance policies qualify for reverse life insurance?
Permanent life insurance policies, including Universal Life Insurance and Flexible Premium Adjustable Life Insurance, are good candidates for reverse life insurance. If you have term life insurance, then you can opt for a term life insurance settlement.
Don’t lose your lifelong investment. Discover your policy’s value today.