Selling your life insurance is an option you might consider if
you're in a difficult financial situation for which you don't
see a close end. A terminal illness or old age could cause you
to think twice about paying those hefty premiums at this stage
of your life. Selling your life insurance carries with it
complex implications and substantial risks, so it is important
that you educate yourself regarding the big picture. If you're
interested in selling your life insurance, this is a good
starting point to obtain some basic information.
Basics: Vocabulary
If you've already done any research on selling your life
insurance, chances are good that you've come across two main
terms: viaticals and life settlements. Both refer to the selling
of your life insurance to a third party. So what's the
difference? "Viatical" is typically used to refer to the
transaction involving a chronically or terminally ill insured,
while a "life settlement" is a transaction involving a senior
(generally over the age of 65) who is not terminally ill.
Even though
you now know the difference, it does not mean
that your state does. These terms might be used interchangeably,
or your state might use one of them to refer to both
transactions. For example, your state could use "Viatical
Settlement" to refer to any type of transaction regarding
selling your insurance. Be aware that this kind of ambiguity may
exist in relation to the vocabulary used in the sale of your
life insurance.
How it Works
The owner of the life insurance policy will sell it for a
percentage of the death benefit a lump sum to a third party and,
in exchange, receives an often substantial lump sum payment. The
third party then becomes the new owner and/or beneficiary of the
policy and pays all of the future premiums and eventually
collects the death benefit when the insured passes away.
Those considering selling their life insurance may either
directly approach a viatical company or settlement firm, or they
may choose to work with a broker. The broker will act as an
intermediary and present the information to several different
companies/firms in an effort to find the highest price for the
sale.
The settlement firms buy the insurance on behalf of investors.
In this situation, the investors become the owners and
beneficiaries, and the settlement firm pays the premium until
the insured dies. The firm then collects the death benefit and
either pays its investors a percentage of the annual return or
repackages the policy for sale to another party.
Take comfort in know that the process of selling one's life
insurance is typically very confidential. Most viatical
companies and settlement firms understand the discretion
necessary to make the process run smoothly and easily. However,
a company may act disrespectfully and become borderline
intrusive by trying to keep track of the insured's condition.
For this reason, it is important to work with a respectful,
experienced organization.
Who Considers Selling
Those with serious, life-threatening illnesses are most
likely to consider selling their life insurance to provide cash
for various expenses, such as mounting medical bills. For those
who are not terminally ill, selling the life insurance might be
a good idea for a number of reasons. If the owner's beneficiary
has died or if the owner can't afford to keep paying the
premiums, it would appear that they no longer have sufficient
use for the life insurance. Seniors around retirement age may
also consider selling their life insurance, even if they are
free of debt, in order to receive a lump sum of money with which
they may do whatever they please.
Keep in mind that different companies may have different
eligibility requirements to be able to sell your life insurance
policy.
Advantages to Selling Your Life Insurance
It might be easy to see some of these benefits, but others
are a little less obvious.
- You'll receive a lump sum cash payment right now. As
mentioned above, this is especially useful to the terminally ill
who have mounting medical bills.
- You will receive more by selling your life insurance than
you would if you simply surrendered it to the insurance company.
It is possible for an insured person who is 65 or older or who
is terminally ill to sell a policy with little or no cash value
for a $100,000.00 or much more.
- You won't have to pay any more insurance premiums. If your
financial situation is becoming strained with no end in sight,
eliminating premiums is a way to alleviate the burden.
- You don't have to repay the money, like you do when you
borrow against your insurance policy.
- Even though your life insurance benefits won't be available
once you die, you can still leave money to a certain person or
organization - it will just come from the money that is leftover
after using the funds from selling your policy. So, selling your
life insurance does not mean that you're definitely robbing
your beneficiaries of their gift.
- In some cases, the money you receive is tax-free.
- There are no regulations or restrictions on how you make use
of the money you receive. You may spend as much of it or as
little of it as you wish, however you please.
Risks of Selling Your Life Insurance
Understanding the risks associated with selling your life
insurance will help you make an informed decision. Be sure to
consult a financial advisor or tax attorney to make sure you
understand the implications of the sale.
- You might lose your eligibility for some public assistance
benefits, especially those based on your income and assets (such
as food stamps, welfare, Medicaid and some Social Security
benefits).
- There could be tax issues. Selling the policy will result
in a tax bill if the settlement amount exceeds your cost basis.
With improved medical care, the ill person may live longer than
expected.
- You might face unhappy heirs. This might not be a problem for
you, but it could lead to a long road of (possibly legal)
complications and battles. Some settlement actually companies
require the beneficiaries to also sign off on any sale, which
could be good or bad, depending on whether or not you're dealing
with a cooperative beneficiary.
Other Options
If you come to the conclusion that selling your life
insurance policy is not for you, there are other options (though
none that would provide you with such a large lump sum). An
insurance agent should be able to help give you more information
on some of these ideas.
- Borrow against your insurance policy
- Cash out the policy if it has surrender value
- Look into accelerated benefits or living benefits
- Borrow money (from family or friends perhaps) and use the
life insurance policy as collateral
If you believe that selling your life insurance policy is the
right decision for you, make sure you deal with a dependable,
experienced broker or settlement company to ensure that you get
the best service and results from your transaction.
About the author:
David Springer is a consultant for Sovereign Funding Group. An
experienced, reputable company that offers convenient, no-risk
services to help you with the selling of your deferred payments,
business financing solutions including
viaticals and life
settlements.
