The Pros and Cons of Life Settlements

Clock October 12, 2021


You’re considering selling your life insurance policy in a transaction called a life settlement.

Now, you want to weigh the pros and cons so that you can make a well-informed decision. That is a great idea – selling your life insurance policy is a big decision, and you should understand all aspects of it.

The good news is that there are plenty of advantages to life settlements.

To help you get a good understanding of some of the pros and cons of life settlements, we’ve broken it down for you here. 

  • The Pros: By law, a life settlement always pays more than if the policy is lapsed or surrendered.
  • The Cons: If you sell your life insurance policy, you are no longer the owner and your original beneficiaries will not receive the policy’s benefit.

Benefits of Life Settlements

If you no longer need, or can no longer afford your life insurance policy, a life settlement may be a good fit for you. Before you decide on a life settlement, however, here are some things to consider.

Is selling your life insurance policy a good idea? Yes, it can be a great financial decision if you are planning on letting the policy lapse or surrendering it back to the insurance company. If you are 65 or older and have a policy that’s worth $100,000 or more, a life settlement is frequently the best option. If you qualify, a life settlement can provide a lump sum of cash you can use to cover expenses and get the most out of your years in retirement.

Here are a few life settlement pros:

A life settlement is more valuable than lapsing your policy. When a policy is lapsed, the policy owner receives nothing. It’s like walking away from your car with the keys in it. A life settlement pays more than nothing, so it is always more valuable to sell the policy rather than let it lapse.

It’s more valuable than surrendering your policy. When a policy is surrendered, the policyowner receives its cash surrender value (if it has any accumulated cash value). While this does return some value to the policyowner, it is less than a qualified policyowner can get through a life settlement. With a life settlement, you get the market value for the policy, which, “is generally four or more times greater than if they lapsed or surrendered their policy,” according to a report by the National Association of Insurance Commissioners.

You receive a lump sum of cash. Sometimes seniors have an immediate need for cash for healthcare costs, unexpected expenses, or long-term care. With a life settlement, you will receive the entire amount at once so you can meet those needs and have peace of mind. (You might also be able to sell only a portion of the policy for a smaller amount of cash and keep the remaining death benefit for loved ones.)

You can use the cash how you want. Do you or a family member need money now? Whether you need money for healthcare costs, to supplement your retirement, or for unexpected expenses, selling your life insurance makes it possible for you access the policy’s market value today. It’s your money to spend as you wish.

Disadvantages of Life Settlements

With so many benefits, it’s hard to imagine any disadvantages to life settlements.

Still, there are a few things to consider before going this route.

You might not be able to get more life insurance. There are limits to how much life insurance someone can have. Although most people who sell aren’t going to try to get more insurance, selling a policy may make it harder to obtain new insurance. Life settlement companies encourage people to keep the insurance that they need.

You may have to pay taxes on your life settlement proceeds. Life settlement proceeds may be subject to certain taxes. Factors affecting taxation include the amount of the life settlement, the amount of premiums paid, and the type of policy. In cases where the insured person is chronically ill or terminally ill the proceeds may be tax-free. The best thing to do is to contact a tax professional for advice when selling a policy.

Beware of hidden fees and commissions. A life settlement must be transparent, and any fees to brokers or third parties must be disclosed. Unfortunately, not all companies operate the same. Pay close attention to hidden fees and commissions, and make sure you only work with companies that provide a safe and secure financial transaction.

Your beneficiaries might not receive anything. In some cases, a life settlement means that the policy’s death benefit will no longer be available for your loved ones. However, in some cases it’s possible to sell only a portion of your policy and still provide for your loved ones. This is called a retained death benefit.

A life settlement can be a great option for many seniors who need cash right now. Once you decide you’re ready to sell your policy, we invite you to see if you qualify for a life settlement today.

Step 1: Finding out if you prequalify for a life settlement

Most policies that can qualify for a life settlement are universal life insurance policies. Other types of policies that can qualify include whole life, and even term life in some circumstances (although generally only if it is convertible). However, even if you have a universal life insurance policy, you’ll need to meet certain criteria to qualify for a life settlement. In general, life settlements are best suited for people who are 65 years old or older, have experienced a change in their health since they first purchased the policy, and own a policy of $100,000 or more.

In some cases, healthy policyowners who are over 70 and who have universal life policies of $200,000 or greater can also qualify.

Do you fit into one of these scenarios? Then you can may be able to prequalify for a life settlement! You can find out for sure by calling us, chatting with us, or completing out life settlement estimate calculator.

Step 2: Completing your qualification

If you do prequalify, one of our life settlement experts will find a time that works for you to ask a few more questions about you and your policy. After that, your dedicated expert will gather some additional details from your life insurance carrier, as well as from your healthcare provider or providers on your behalf. This information helps ensure we’re able to make the highest offer possible for your policy.

Step 3: Accepting your offer and receiving your life settlement payout

Now, your life settlement expert will finish gathering all the necessary information to complete your policy appraisal and make you an offer to purchase your universal life insurance policy. They may need to call or email you a few times to ask some clarifying questions. Soon thereafter – oftentimes within just a few days of gathering all necessary materials – you’ll receive an offer to purchase your policy. The offer carries no obligation, so if you wish, you may decline the offer and continue paying to maintain the policy. However, if you are happy with and accept the offer, we’ll begin the behind-the-scenes work necessary to complete the sale of your universal life insurance policy for a large cash payout.

If you’re ready to start the process of selling your universal life insurance plan, you can get started here.

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