Photo (cc) by Tax Credits
If you have a life insurance policy you no longer want or can’t afford, stopping payments or simply cashing it in aren’t your only options – or your best ones.
Many people have sold their policies in a life settlement sale and come out the other side with cash in hand — but it isn’t easy. In the video below, Money Talks News founder Stacy Johnson explains how life settlements work. Check it out and read on for more.
How it works
You can convert your life insurance policy into cash now, but the process is complicated. First, you’ll need to have your life insurance policy appraised to determine the selling value. Then, you’ll need to find a buyer. Once you have a buyer in place, you’ll receive a cash settlement and the buyer will pay any premiums and collect the benefit when you die.
Finding a buyer on your own can be complicated, if not impossible, which is why many people choose to either sell their policy to a settlement company or to a third party through a life settlement broker. If you sell to a settlement company, you’ll receive a percentage of your policy’s value in cash. If you use a broker, you may also pay a commission to the broker. However, a broker may be able to find a better deal than you would on your own.
What you need to know
There are a few things you should consider before selling your policy. For example:
- Your life insurance policy may not have much value on the market. Life settlement broker Alex Jones told Stacy that only about 25 percent of the policies he sees are worth anything.
- You won’t get the full face value. A 2010 report from the U.S. Government Accountability Office found that sellers received about 13 percent to 21 percent of the value of their policy.
- Brokers charge a commission. The GOA report says that in 2009 commissions were about 9 percent.
- Buyers don’t want every policy. Bankrate reports that buyers are looking for people over the age of 65 with chronic or terminal illnesses. If you’re young and healthy, your policy won’t be as attractive to a buyer.
- You may have tax complications. Your settlement could be subject to income tax.
- Your eligibility may change. The Federal Trade Commission warns that a life settlement could change your eligibility for government assistance programs.
- It isn’t your only option. If you’re selling because you need cash, you may have other options, such as taking a loan against your life insurance policy, accelerating your payout date, or selling the policy to a family member. However, keep in mind that these options also have pitfalls and should be discussed with a financial adviser.
How to sell
Selling isn’t all bad, especially if you no longer want the policy or you can’t afford the premiums. If you do decide to sell, take these steps to make sure you get the most money.
- Understand the rules. Your life insurance policy has rules about selling and your state laws regulate the process. Make sure you understand these before you try to sell. If you don’t fully understand, an independent financial adviser can help sort things out.
- Don’t take the first offer. There are no set values for life insurance policies, and the offers you receive from buyers can vary widely. Review several to make sure you’re getting the best deal.
- Talk to an expert. Consult an accountant to see what tax liability and eligibility changes you will face after the sale.
- Check your debts. If you have large debts, your creditors may have a claim to any cash you receive from your life insurance settlement. If you have debts, discuss them with a financial adviser before you sell.
The bottom line: If you don’t want your life insurance policy, it’s worth a call to find out what you could get, but be cautious about going through with it. Make sure you’re getting the best possible deal before you sign off.