Life Insurance Settlements

When and How Life Settlements Can Be Used and When They Are a Bad Idea

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All About Life Settlements

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Life insurance settlements can be beneficial for seniors
Pros and Cons of Life Insurance Settlements

Evaluating a Life Settlement and the potential value it can provide can be an important part of retirement planning.

The reasons for seeking a Life Settlement can be as varied as individuals' retirement plans. Common reasons for seeking a Life Settlement include:

  • The Life Insurance payments are burdensome
  • Your policy does not perform as expected
  • You require additional funds for medical expenses
  • A need to pay for a long-term care policy
  • You wish to upgrade your current life insurance policy
  • Divorce makes the policy unwanted
  • Your children are grown and no longer require the protection
  • You wish to use the money now for a vacation home or travel
  • A business is closed
  • You wish to give the money to a charity
  • You no longer have a need for Life Insurance due to:
    • A diminished need for the safety net a life insurance policy provides
    • Being over-insured
    • Tax law changes which may have reduced your need to subsidize estate taxes
    • Other circumstances

Benefits of Life Insurance Settlement

Many families have benefited from Life Insurance Settlements. Consider these scenarios:

  • Pursuit of Lifelong Dream with Lapsing Term Insurance: A 67 year old man owned a ten year old convertible term policy which was nearing the end of the 10-year guaranteed period and about to lapse.

    He no longer needed the coverage to protect his family. By selling the policy he was able to generate $276,000, which he applied to a lifetime dream of participating in ownership of a vineyard.

    Male, age 67
    Term Policy: Face Value = $2,000,000
    Cash Surrender Value = $0
    Settlement Offer = $276,000
    Value Created = $276,000

  • Retirement Income and Relief from Premiums: An 80 year old policy owner could not afford to continue premium payments as she was experiencing a negative cash flow living on a fixed retirement income. By eliminating her premium payments and by purchasing a fixed lifetime annuity with the proceeds from her Life Settlement, she was able to make ends meet, with some additional funds for travel.

    Female, age 80
    Universal Life Policy: Face Value = $600,000
    Cash Surrender Value = $45,735
    Settlement Offer = $120,000
    Value Created = $74,265

  • Subsidize Retirement Assets and Long-Term Care Insurance: A 72-year old doctor was diagnosed with cancer. Upon diagnosis the doctor decided to retire immediately, but needed extra funds to subsidize his retirement and additional insurance for when he might require hospice care. He chose to use a Life Settlement to purchase a long-term care policy, increase his investment holdings and maximize retirement income.

    Male, age 72
    Universal Life Policy: Face Value = $800,000
    Cash Surrender Value = $78,000
    Settlement Offer = $363,000
    Value Created = $285,000

Disadvantages of a Life Settlement

For many people, a Life Settlement on an unneeded life insurance policy is a huge financial boon. However, there are a few disadvantages that may or may not apply to your situation.

  • Forfeiting a Larger Sum That Could Be Left to Heirs: The most obvious disadvantage of a Life Settlement is that you are giving up the future insurance proceeds that your heirs might receive upon your death.

    If you were to continue paying the premium on your Life Insurance Policy, the amount of money your heirs could receive upon your death would always be higher than the immediate amount you would receive in a Life Settlement.

    However, for many retirees the benefits or necessity of a windfall of cash or the relief from the premium payments outweigh the future expectation of the death benefit.

  • Impact on Medicaid or Other Low-Income Assistance: If you are considering a Life Settlement and are benefiting from any kind of low-income assistance like Medicaid, you should consult with the appropriate government agencies to see if your benefits would be impacted by the cash infusion of a Life Settlement.

  • Proceeds Could Be Claimed by Creditors: Legally, the proceeds from a Life Settlement could be claimed by creditors. This is an important consideration if you have large amounts of debt.

  • Tax Implications: Life Insurance benefits are usually income tax-free. Life Settlements on the other hand may be subject to both federal and state income tax. Any earnings in excess of the premiums you have paid can be taxed.

Click here if you are interested in finding out how a Life Settlement could improve your retirement.