Many people make the decision early in their adult lives to purchase life insurance. This is especially true once you have a family. After all, you want to do everything you can to make sure your loved ones will be cared for and to ensure that they will have financial security if anything were to happen to you. You want to set them up for success.
But once your children have grown up and are financially independent, you may start to wonder if the life insurance policy you bought years ago is still necessary. In this situation, selling your life insurance policy for cash might be a good option for you. Some of the benefits of choosing a life settlement option or a viatical settlement option include:
If you have recently made the decision to sell your life insurance policy for cash, you might be trying to figure out the difference between a traditional life settlement and a viatical settlement. While both options will provide you with either a lump sum cash payment or a series of payments over a fixed period of time, the two have some distinct differences to be aware of.
You will need to understand how each option works and also be aware of their unique implications so that you can make the best decision regarding the sale of your policy. There are different qualifications for each option and they also have different tax implications. You will want to talk with a trusted financial or tax advisor so you won’t be hit with any unexpected surprises.
Fully understanding your own situation and each settlement option will help you obtain the highest possible payout upon the sale of your life insurance policy. It will also help ensure that the process goes as smoothly and as quickly as possible once you begin. You can speak with your insurance agent or a life settlement advisor to help you decide which is the best option for you.
Life settlement:
A traditional life settlement, also known as a senior life settlement, is the sale of a life insurance policy that is no longer wanted or needed. If you purchased a life insurance policy in the past and your life circumstances have changed and you no longer need the policy, you may consider selling it for cash.
In this scenario you would, either on your own or working with a life settlement broker, find a buyer for your life insurance policy and transfer ownership of the policy and any benefits to said buyer. You will receive a lump sum payment or cash payments over a specified period of time. The buyer will assume the responsibilities of the premiums on your policy and will be entitled to any death benefits from your policy upon your death.
The payout you will receive will generally be higher than the cash value surrender option but lower than the death benefits. You could receive up to four times as much from selling your policy as you could from surrendering your policy for its cash value. This is a direct payment option and not a loan, and you will not have to pay anything back to anyone.
You may also spend the money however you want. There are no guidelines or requirements that dictate how the money is spent. You may choose to use the funds to cover healthcare costs, pay off or purchase a home, or to fund your retirement.
Viatical settlement:
A viatical settlement is the sale of a life insurance policy for cash, similar to a traditional life settlement. However, in a viatical settlement the insured must have been diagnosed with a terminal illness and have a life expectancy of around two years, or sometimes as many as four years.
When a person is diagnosed with a terminal illness, they often face the uncertainty of how they will cover the costs of their medical bills. A viatical settlement can provide the needed funds for an insured and their family to relieve some of that burden. This can ease the burden on the insured and help them feel confident that the family of the terminally ill will not be left with a lot of medical debt upon their passing.
It is important to understand the relationship of the time value of money to a viatical settlement. The longer a person’s life expectancy is, the lesser the amount of money that will be paid out for their policy. Also, the longer that person lives the lower the return is. This is why a potential buyer in a viatical settlement will want to know the insured’s medical history and any current diagnoses, including expected lifespan
Comparing life settlements with viatical settlements:
While traditional (senior) life settlements and viatical settlements share many characteristics, they also have some key differences. As noted previously, to qualify for a viatical settlement a person needs to have been diagnosed with a terminal illness and have a life expectancy of no more than four years. Some of the conditions that are included in a terminal diagnosis are:
A traditional life settlement does not require that you have a terminal diagnosis, but in most cases, you will still need to aged sixty-five years or more. Another thing to consider is that most settlements involve a permanent form of life insurance, either a whole life policy or a universal life policy. In some cases, however, a term life policy can be used. This is especially true if the term life is convertible to a permanent type of life insurance. Your life settlement broker can help you determine which policy you’ve got and how to proceed.
There are some financial aspects to be aware of for each option as well, and these include:
No matter which option you decide is best for you, you can sell your policy on your own or with the help of a life settlement advisor or broker. You will want to research the process and make sure you fully understand how it works, especially if you choose to sell the policy on your own.
A benefit to selling your life insurance policy without the services of a life settlement broker is that any commission the broker would have received will not be taken out of your settlement, so you will keep the entire payout. Some potential concerns include that by skipping the bidding process a broker would use, you might not get as high of an offer on your policy. Also, you won’t have the guidance of the broker if you’re unsure at any step in the process.
If you choose to use a broker, you won’t need to pay anything upfront, but you should be aware that there will be a broker’s fee (a commission the broker is paid for the sale of your policy) and it will be deducted from your settlement prior to you receiving the funds. You will want to discuss this with your broker so you know what to expect. You will, however, have the help of an experienced settlement advisor to guide you through the process.
Deciding which is right for you and the next steps:
Once you fully understand the qualifications and potential implications of both the traditional/senior life settlement and the viatical settlement options, your next step is to decide which option is best for you and your loved ones. This will involve an honest evaluation of your life circumstances, current health and medical standing, and a discussion about your future plans.
When you have made your decision, your next step will be to talk with your insurance agent or a life settlement advisor to get the process started. While the process may vary from one company to another, the same general steps will be followed:
Some companies specialize solely in viatical settlements while others offer both traditional life settlement options and viatical settlement options. Either of these can help you sell your policy. You will want to find a company you feel comfortable using. Life insurance brokers are licensed and are bound by fiduciary responsibility to work for you in order to help you obtain the highest cash payout possible from the sale of your policy.
No matter which option you decide is best for your situation, a viatical settlement or traditional life settlement either one will likely provide you with substantially more cash than surrendering your policy for its cash value would. You will be able to sell your unneeded life insurance policy and obtain the cash payout you need to take care of matters while you are still living.
No. While they share some characteristics, they are not the same thing. To qualify for a viatical settlement a person must have a terminal diagnosis. To qualify for a life settlement a terminal diagnosis is not necessary.
No, once you receive your settlement you may spend the money how you see fit. While many people use it for medical expenses, others use it to fund their retirement or to pay off or purchase a home.
If you change your mind at any point during the process, simply communicate with your broker and let them know you no longer want to sell the policy.
The timeline will vary from policy to policy, but an average is around six to ten weeks. Once your situation has been reviewed and you have chosen a settlement option, your broker will be able to provide you with a timeline specific to your sale.
No. You may choose to sell your policy without the help of a broker. There are some pros and cons to each option and you will want to review them both carefully so you make the best decision for your situation.
Any cancer that is deemed terminal, Alzheimer’s disease, and Amyotrophic Lateral Sclerosis are three conditions that are common diagnoses in a viatical settlement. However, you will want to review your situation with your doctors and advisors to see if you will qualify.
Possibly. While a viatical settlement is not usually subject to taxation, a traditional settlement might be. It is important to talk with a tax advisor in this situation to fully understand any potential implications.
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