What should you do with a life insurance plan that you don’t want anymore?
Most people make the mistake of letting the insurance plan die out when they no longer need the policy or cannot afford to pay the premiums.
However, your insurance policy is a financial asset. With a skilled agent, you can walk away with a nice sum of cash through a life settlement.
Is this the right course of action for everyone? No. But in specific situations, this could be a helpful option.
A word of caution: PLEASE do not try negotiating by yourself. Most life settlement companies are unethical and predatory. A good life insurance broker negotiating means thousands more in dollars in your pocket.
First, let’s discuss the basics.
What is a life settlement?
Life settlements are when a third-party company buys out your life insurance policy. After the sale, they continue to pay the policy’s premiums. When the original owner dies, the third party company collects the death benefit.
You pocket a percentage of the payout right now rather than your beneficiaries collecting the entire payout later. How much you are paid depends on what you’re able to negotiate with the company buying the policy.
If you’re smart — and I know you fall into that category — you’ll hire someone experienced in life settlements to negotiate on your behalf.
Most life insurance policies enforce a two-year waiting period between the purchase of a life insurance policy and when it can be sold. Some states even have a five-year waiting period.
Your age and health determine if investors would be willing to take on the risk of your policy. However, unlike when you first buy your policy, age and health now work in reverse. The older or sicker you are, the more likely a company will be willing to buy out your policy.
When should you consider a life settlement?
In most cases, I advise against life settlements. If you have dependents who need to be supported after your death, selling your life insurance policy just doesn’t make sense.
However, there are two scenarios where life settlements could be a viable option.
Scenario 1: An older person with no dependents
The first candidate for a life settlement is an older person without any pressing need for an ongoing life insurance policy.
Maybe you never had children, your spouse has enough funds of their own, and you don’t have any other dependents who would be relying on insurance money after you die.
Or maybe your children are all grown up and financially secure, and you just want to be able to enjoy the time you have left. Go and travel around Europe. Walk the Great Wall of China. Be able to give gifts to your grandchildren now, when you can watch them enjoy them.
If you’ve spent years paying into a policy that no one would benefit from, you’re entitled to enjoy some of those funds now.
Scenario 2: Someone with a terminal diagnosis
The other situation where I would recommend a life settlement is if someone was diagnosed with a terminal illness. This is often called a viatical settlement, but the idea is the same.
It might be that the doctors have given you less than two years to live. Or you might have a chronic condition and no living benefits to help pay for the extra cost of your care.
A life settlement offers immediate funds to pay medical bills, cross experiences off your bucket list, cover expenses while you are unable to work, or whatever else you may want to use it for.
What are the downsides to life settlements?
So what’s the catch?
First, you must be willing to turn over all your medical records to the company that buys your policy. These companies are thorough because they want to ensure they aren’t making a bad investment.
Second, your beneficiaries won’t see the full payout amount if you had kept it until your death.
A good life settlement will offer between 40% to 50% of the value of the policy. So a policy worth $100,000 could mean $50,000 in cash. A million dollar policy could result in $400,000 to $500,000 to spend as you chose.
However, most life settlement companies won’t offer you more than 25% to 30% of the value of your life insurance. In my book, that’s an unethical ripoff.
Before you accept their offer, give me a call. My insider knowledge of the life settlement business means that I negotiate the best offers.
Let’s talk about your goals and your options. Fill out the form below to get started.
