What is a life settlement?
A life settlement is a financial instrument that allows a consumer to receive the maximum current cash value of their life insurance policy. This product is designed for people who no longer want their life insurance benefits.
How does a life settlement work?
If your life insurance policy has a cash surrender value, you can cash in your policy with your insurer at any time and receive the cash amount. If you get a life settlement, an investor buys your insurance policy from you and holds onto it. In many cases a life settlement broker can get you more money for your policy than your insurance company is willing to pay you. The investor who buys your policy becomes the beneficiary. Upon your death, the investor receives the death benefit instead of the existing beneficiary on your policy.
Why would someone want a life settlement?
- Many people's financial needs change as they get older.
A person's spouse may have already died, leaving nobody to benefit from the insurance coverage. A person could develop a terminal illness that exceeds current health insurance coverage. A change in financial status could make current insurance premiums too much of a financial burden. A life settlement allow a person who needs money to preserve their quality of life now.
- A favorable change in estate tax laws can also be a reason to get a life settlement.
Lets say you were planning to use your coverage proceeds to offset your estate taxes upon your death. If tax law changes reduce your estate tax burden, you may no longer have to use your policy to cover these expenses. A life settlement will allow you to receive cash now, and use the proceeds however you want to reflect your current lifestyle needs.
- Having an underperforming insurance policy can also be a reason to consider a life settlement.
Often the value of your insurance policy is tied to investments made by your insurer. You may feel that your money could be better used in other investments. A life settlement will allow you to get the most cash out of your policy now, and allow you to invest your money in ways you feel will receive a better rate of return.
Consult with a life settlement professional to see if a life settlement is right for you.