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Life insurance can help protect the policyholder's family members after they pass and sometimes it even offers benefits to the living. But if the policyholder no longer wants or needs the coverage, they may wonder whether they should sell the life insurance policy. In this article, we'll look at how these life settlements work and who they make sense for.
Selling a life insurance policy to a third party is known as a life settlement. The amount the policyholder receives can sometimes be more than the cash surrender value of insurance, but it's usually much smaller than the policy's death benefit.
The policyholder enlists a broker who helps them find a buyer. That buyer pays the policyholder a lump sum, and the broker takes a cut of that as their payment. Then, the buyer continues to pay the policy's premiums and receives the death benefit when the original policyholder dies.
When selling your life insurance policy, here are the basics steps you'll go through:
There are several factors that influence how much a person might get from a life insurance settlement, including:
Brokers typically like to work with policyholders who are at least 65 years old, as they are likely to die sooner than younger individuals. This means buyers will able to profit off their investment sooner.
Individuals in poor health usually receive more money than individuals in good health. This is also because poor health indicates that the policyholder is likely to die sooner.
Brokers usually require policyholders hoping to sell a life insurance policy to have a death benefit of at least $100,000 to interest buyers. Those who have policies with higher coverage limits usually get paid more than those with smaller policies.
Buyers will pay more for insurance policies underwritten by companies with stronger financial strength ratings from independent organizations, like A.M. Best or Standard & Poors. This indicates that the company will be around for decades to come and is capable of paying out its obligations to policyholders.
To those wondering "Should I sell my life insurance policy?", here are a few scenarios when it might make sense and a few where it might not.
A life settlement could be a good idea for individuals that no longer require life insurance because they don't have any more dependents relying upon their income. Those struggling to afford the premiums and those who need a lot of cash all at once may also want to consider it. However, there are other alternatives that might help these individuals without some of the pitfalls of life settlements.
Selling a life insurance policy isn't easy, because buyers want to be fairly certain the policyholder will die soon so they can get their payout. Younger policyholders and those in good health may have a tough time finding anyone interested in working with them. There are better ways for these individuals to get out from under their life insurance policy.
Here's a look at some of the pros and cons of life settlements:
The benefits of selling a life insurance policy are obvious: The policyholder no longer has to worry about making the premium payments. They also get a lump-sum payment they can use for whatever they want.
Selling a life insurance policy can be complex and it doesn't always deliver great returns. Most people get paid far less than their death benefit, and brokers charge high commissions. On top of that, the policyholder may have to pay taxes on the life settlement amount, so they could lose some of it to the government.
If you plan to cash out your life insurance policy, take the following steps:
Not all life settlement companies are legitimate, so it's important to research the company thoroughly before agreeing to any deals. Policyholders should make sure they're licensed in the state and ask any questions necessary to learn about how the company operates. Policyholders should feel comfortable with the company they're working with before going through with the life settlement.
If a life settlement doesn't seem like a good fit, one of these alternatives might be better:
To do a life settlement, a policyholder typically needs to be at least 65 or older with a permanent life insurance policy that has a death benefit of $100,000 or more.
Any proceeds the policyholder receives up to the tax basis (the total amount they’ve paid in premiums over the years) is tax-free. Anything in excess of the tax basis up to the cash surrender value of the policy is taxed as ordinary income, while anything over the cash surrender value of the policy is taxed as capital gains.
Life settlement companies charge commission fees to customers, so they profit when the life insurance policy is sold to a new buyer.
It might be possible to find some buyers willing to purchase a term life insurance policy, but most prefer to work with permanent life insurance.
It's up to each person to decide whether selling their life insurance policy is a good idea. But in most cases, there are other, better ways to handle an unwanted life insurance policy.
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