At some point in many of our lives we have purchased life insurance. We want to ensure that our families are taken care of in the event of our death. When we are in the working years of our lives and we’ve got dependents to care for a life insurance policy is a sensible option.
What happens, though, when our children have grown up and moved out and are financially independent? Having a life insurance policy with a monthly premium to pay might not be the best option anymore.
This is where a life insurance policy buyout, or life settlement, can be beneficial to you. A life insurance buyout is a process in which a policyholder sells their life insurance for a cash payout. This can be either a lump sum payout or a series of payments to be paid out over a predetermined period of time.
Deciding if life settlement is right for you:
There are some factors you want to take into consideration when deciding if a life insurance buyout option is the best for you:
If you have evaluated your situation and determined that no dependents will need the money from a settlement of your policy in the future, that you need cash now to help fund events in your life, or that you’d like to eliminate one monthly expense, life insurance buyout could be a great option for you.
Who is eligible for a life insurance buyout/settlement option?
The criteria that need to be met for a policyholder to sell their life insurance policy for cash are fairly simple and straightforward.
While each life insurance settlement company will have their own policies for eligibility, you will likely have the best luck selling your policy for cash if you are aged sixty-five or older and you have a permanent (whole life or universal life) policy that is valued at $100,000 or more. Often, potential buyers will also want to see the insured’s medical records. Of particular interest is anything in the medical records that points to a shorter life expectancy, as any such conditions could result in a higher chance that your policy will sell.
If I decided to sell, who buys my policy?
While it is an option for you to sell your policy directly to a buyer, often the sale is arranged and handled by a life settlement company. In this case you would talk with a life settlement advisor, or broker, and together you would review your policy and determine the best way to proceed.
If you decide to sell the policy on your own, there will be no bidding process and you may end up with a payment that is less than what you could have received if you used a broker. On the other side of that, a broker will receive a commission for the sale of your policy that is deducted from the funds. If you don’t use a broker there will be no commission taken from your funds. You will want to understand and consider the implications of both options.
An insurance company’s concern is that the policy premiums be paid as agreed, not who gets paid. Even once your policy has been sold it remains in effect as long as the premiums continue to be paid. Once you sell the policy, the premiums are the responsibility of the buyer.
Investors use life insurance policies they have purchased to create a diverse fund of policies. They turn them into financial assets. Life insurance buyout or settlement is an attractive option for investors to purchase a large number of policies. You, the seller, get the benefit of the cash payout. Whether referred to as a life settlement option or a life insurance buyout, the process is the same.
How does the buyout process work?
They process of selling your life insurance policy is not complicated, but it is important that you understand how it works and any implications to avoid any surprises along the way. You want to make sure you don’t rush the process and if you have questions or need more time, don’t be shy about speaking up.
One important thing you’ll want to understand is that there are some potential tax implications involved in a life settlement. You will want to consult with a trusted tax advisor so you know how that could affect you.
Once you’ve decided that you understand the process and any implications, you’re ready to begin the process. The steps will be:
Some of the main things that will determine your payout include higher death benefits, lower monthly premiums, and the insured’s life expectancy. Buyers are more likely to purchase a policy that they can expect a high payout from.
Once the policy has been sold you will receive the funds. The buyer assumes responsibility for the premiums and will receive the benefits upon your death.
How long can I expect the process to take?
An average life insurance buyout can take around six to ten weeks. This number varies from sale to sale, however, and yours could take either less or more time. Things like your current life situation and your specific insurance policy can affect how long the sale might take.
Once you’ve submitted all the proper forms and documentation, the process still takes some time to complete. Analysts will review the financial aspects of your policy, your age, and your health to decide how much they will offer you to buy out your policy.
Once you have signed all the necessary paperwork, the settlement advisor should be able to give you an idea of how long it will be before you can expect to receive your funds. You may opt to receive your payout via a written check or an electronic funds transfer. If you need or want the money faster, wire transfer might be an option, but you will want to verify that with your financial institution, as well as any possible charges for that type of transfer.
How does a buyout compare to other options?
A life insurance buyout is not the only option for obtaining cash from your policy. You may also consider surrendering your policy for its cash value. If you’ve been diagnosed with a terminal illness you might also be able to use the policy’s accelerated death benefits.
While both of these might be options that will provide you with some cash while you’re still living, usually you can get a bigger payout from selling your life insurance policy.
Generally, there will be a fee for surrendering your policy for cash value and you might not get as much as you expected. Accelerated death benefits are paid out as a portion of the death benefits from the policy, thus reducing the benefits that will be paid out upon your death. You will also still be responsible for making premium payments while using the accelerated benefits.
Selling your policy for cash will usually yield a higher payout for you and also relieve you of the monthly premiums.
Putting it all together- does this make sense for your situation?
Selling your life insurance policy is a decision that only you can make. There are financial implications to you and your loved ones, so it is important that you have considered all aspects of the decision before you proceed with the sale.
Whether you want to reduce your expenses each month by eliminating your insurance premium or you need a larger amount of cash to take care of things in your life, there are several reasons to consider selling your life insurance policy.
If you have spoken with your family and a trusted financial advisor and have decided that selling your policy is the best route for you, a life settlement company can help guide you through the process and make sure you receive the largest payout available to you.
Usually, yes. Selling your policy will usually provide a higher payout than utilizing options such as accelerated death benefits or surrendering your policy for its cash value.
Selling your life insurance policy does not cost you money upfront. A broker will receive a commission from the sale; however, this is deducted from the funds after sale and not paid upfront from your pocket.
No. Any money that you make from the sale of your life insurance policy is yours to spend as you see fit. While many people use it to help cover healthcare costs, you may choose to buy a new home.
Generally, a sale takes anywhere from six to ten weeks to complete. This may vary depending on the specifics of your sale, however. Your life settlement advisor will be able to help you with a timeline.
Yes, you can sell a policy without involving a life settlement company. This will bypass any bidding for your policy and could result in a lower payout. However, any commission that would have been deducted from your funds will not be taken out, so this is something you will want to consider.
No. A traditional life insurance buyout does not require the seller to be terminally ill. A viatical settlement option, however, does. If you have received a terminal diagnosis, you will want to explore that option.