All You Need to Know About Reverse Life Insurance


In recent years, a larger number of people have become interested in selling their life insurance, which has led to an increase in the popularity of terms such as “life settlement”, or “reverse life insurance”.  Importantly, these two terms don’t refer to the same thing. And reverse life insurance is a completely separate term from them as well. So we’ve created a guide with all you need to know with regards to reverse life insurance.

This is an industry that is over 100 years old, existing ever since the US Supreme Court decided that life insurance policies would be considered as private property in 1911. Because of that ruling, life insurance policies started functioning as assets similar to stocks, bonds, and other investment properties. 

 There have been different ways for people to reverse their life insurance.  Those ways have changed in the past century, and these days they’re considered to be a method of wealth management. In fact, many people use them as a way to increase their wealth. In 2009 the US Senate Special Committee on Aging stated that life settlements generally generate up to eight times more than the cash value that’s supplied by the life insurance companies themselves.

What Does Reverse Life Insurance Mean?

 Reverse life insurance is mainly an umbrella term that’s used for all of the different ways people can get money from their own life insurance policy. The highest paying options for this are viatical settlements and life settlements, however, they’re not the only options available. You can also take out a withdrawal from your insurance, a loan from it, or even convert your insurance policy into a long-term care account. Policyholders can even accelerate their death benefits. Finally, they can also surrender their permanent insurance policy back to the insurance company, but this last option is rarely recommended as policyholders get a better cash value when they sell it instead.

What Are The Benefits of Reverse Life Insurance?

One of the main benefits of reverse life insurance is that it can provide you with a lump sum of cash without disrupting your home equity or investment portfolio. Unfortunately, many people still don’t realize how much value they can get from reversing their life insurance.

If you’re in a situation where your finances have changed, instead of relying on life insurance to provide security for your loved ones, you can reverse it and get immediate financial security. Whether you feel like you don’t want to make the premium payments anymore, if you have some unexpected medical bills, or if you’d like to invest in a business, you can use this guide when deciding on which option would be best for you in terms of reversing your permanent life insurance policy.

What Are The Reverse Life Insurance Options and Their Tax Benefits?

If you’re looking for an influx of cash, you can always get it from your insurance. If you have a permanent life insurance policy, there are plenty of options that you can choose from. They all have different tax purposes under tax laws, so make sure you consult with an expert on them, but we’ll be going over the different taxes too.

Get a Loan Against the Cash Value

One of the options available if you have a decent amount of cash value in your insurance policy is to ask the insurance company for a check. However, you should know that these types of loans have interest and competitive rates. If you have any amount that’s outstanding, along with the interest, once you pass away, it’s going to be deducted from the death benefits.

This is the best option if you want to continue your life insurance policy and have your beneficiaries receive death benefits. This option, moreover,is tax-free as long as the loan amount doesn’t exceed the amount that you pay for the premiums.

Withdraw The Accrued Cash Value

Certain types of life or health insurance might allow you to withdraw some of all the accrued cash value, which is similar to loaning but the amount you get won’t get an interest rate that you have to pay back over time. Depending on how much you withdraw from your whole life policy, the insurance company will decrease the death benefits.

You can also continue making premium payments if your insurance coverage allows that, and it’s best to consult with a financial advisor to check which type of tax treatment withdrawals get.

Convert Life Insurance Policy Into a Long-Term Care Account

Another viable option you get as the policy owner is to sell your insurance policy  and then deposit the proceeds into an account for any of your long-term care expenses for . If this is what you’re looking for, you should first consult with an elder care attorney in order to check whether your state allows it. 

This is also called a Medicaid life settlement, and in states where it’s allowed it doesn’t affect Medicaid eligibility. To do this, it’s better if you have a term life insurance policy, which isn’t generally considered as an asset, instead of a whole life insurance policy.

Life Settlements

There are certain eligibility requirements for life settlements, including being over 65 and having over $50,000 – $100,000 in value for your life insurance. The process of a life settlement can also take a few months to finish, but in the end, you’ll get a payout from selling your life insurance contract in an annuity. 

This life insurance reverse option is subject to income tax, as it’s treated as capital gains, but it’s a great way to get the face value or more from your policy.

Viatical Settlements for Life Insurance Policy

Similar to the last option discussed , viatical settlements also have eligibility requirements.   One of the main requirements is that viatical settlements are for people who have a terminal illness and a certain life expectancy. It’s also similar to a Life Settlement in that you receive a payout in return, and you can use that money to cover medical bills if necessary. Viatical settlements are not subject to any tax laws, as they’re considered to be an advance on  life insurance benefits, which result in taxable income.

Accelerated Death Benefits

As the policyholder, depending on your life insurance coverage, some contracts have the accelerated death benefit  feature. This option allows you to access your death benefits before you pass away. This is a common and universal life insurance addition, and tends to be included in a life insurance policy contract with no additional costs. It’s also mainly used for people who are facing a terminal illness and are looking to put money away in a savings account, or to cover some medical expenses. This money falls under tax exemption status.

This is another option that’s similar to life insurance policy loans, as it decreases the death benefits that beneficiaries receive at the death of the insured, and you can talk to your insurance agent about adding it to your contract.

Surrendering Life Insurance

Finally, any policy owner can surrender their policy back to the insurer and receive a lump sum in surrender value. With this option, you’re effectively terminating your insurance, which means you’re not going to be making any future life insurance premiums. If you’ve made premium payments regularly over a certain period of time, the cash surrender value isn’t going to be taxed.

Unfortunately, your family members aren’t going to receive death benefits with this option, and this is also considered the least attractive out of all the options because typically the surrender payments you get are low, which can impact your financial situation. The only reason to consider this option is in case you don’t qualify for a life settlement.

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Reverse Life Insurance FAQ

How high can the payout be for life settlements?

While sometimes it depends on the face value of the life insurance policy itself, generally, the payout is anywhere between 20% to 60% of that value.

Should you pursue a life settlement if you’re not over 60?

Life settlements aren’t always the ideal option, and if you plan to pursue it, it’s best to wait a few more years and wait until you’re old enough to become eligible for it.

Do you still need to make the premium payments when with reverse life insurance?

That largely depends on the option you’ve chosen, but most of the time it means you won’t have to pay any premiums.

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