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If you no longer need life insurance, a life settlement can offer a larger payout than a policy surrender. But be wary of pushy sales tactics, broker fees and tax implications.
Life settlement providers and brokers have been accused of using sales tactics to pressure senior policyholders into selling their policies. Life settlements are a complicated process and may have unintended financial consequences. Before you sell, check that your provider is licensed and explore its reputation with the Better Business Bureau.
A life settlement is the sale of your life insurance policy to a third-party investor for an upfront one-time payment. This payment is typically more than the policy’s cash surrender value but less than the death benefit.
After paying a lump sum for the policy, the third-party buyer becomes the policy beneficiary and agrees to pay the policy’s premiums for as long as you live. When you die, they receive the policy’s death benefit.
There are circumstances that may warrant a life settlement. Here are the most common reasons for selling a life insurance policy:
Here’s what to expect from the life settlement process:
According to a study published by the US Government Accountability Office in 2010, policyholders who underwent the life settlement process typically received 13% to 21% of their policy’s value. A London Business School study in 2014 suggested that Americans can expect to be offered more than four times their policy’s cash surrender value in a life settlement.
Typically, the older you are, the more you can sell your policy for — that’s because your life expectancy is lower. Unlike your insurance company, a buyer is invested in you dying sooner. But, ultimately how much you receive in exchange for your life insurance policy hinges on a number of factors, including the value of the policy, the cost of premiums and your life expectancy.
Before you sell, consider the following:
In 2017, the Tax Cuts and Job Act (TCJA) was revised to make it easier and more appealing for seniors to sell their life insurance policies rather than surrendering them.
Previously, policyholders who wanted to sell their policies were required to reduce their tax basis. This meant they had to deduct expenses relating to the “cost of insurance” over the life of the policy.
Under the new law, policyholders don’t need to do that. Instead, the same tax rules apply to both life settlements and surrenders, so sellers pay less capital gains tax overall.
If you need money but want to keep your life insurance policy, consider these life settlement alternatives before you make a decision:
There are many factors to consider before you sell your life insurance policy, including broker credentials, tax implications and potential fees.
Research your life insurance options before you sell to ensure you make a well-informed decision for your future.
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