A life settlement is a good option for many. You sell your life insurance policy, getting more cash from it than you would’ve if you had surrendered it to the insurance company. But that doesn’t mean that a life settlement is right for everyone.
In essence, getting a life settlement is not that different from selling any other asset. Just like you can sell your car or your house, you can also sell your life insurance policy if you no longer want it or need it. But just like with selling your car, you need to keep two things in mind:
- Once you sell your policy, you won’t have life insurance coverage.
- If you decide you want a new life insurance policy in the future, it’ll be harder to get one.
Replacing your current policy with another one with lower premiums is also an option for those who do not wish to sell their life insurance.
Who Shouldn’t Sell Their Life Insurance
You are Risk Adverse
Life settlements aren’t well known, so the market is limited (everyone knows you can sell a car, but how many people know about selling their life insurance?). Small markets mean that it can be difficult to determine the policy’s fair price. Are you getting too little for your policy?
One way to mitigate the risk is to work with a licensed professional in life settlements, who can help you assess your options and the fair value of your policy from multiple companies.
You Have Loved Ones That Could Use the Benefit
If you have loved ones with potential significant financial needs, a life settlement might not be an easy choice. Sometimes it will still make sense to sell the policy if you need the money right away but you should weigh the risks and benefits of a life settlement:
If you keep the life insurance policy till the day you pass away, your loved ones receive the policy payout if you have kept paying your premiums (on time and in full). . Most policies premiums increase with age and most policyholders will eventually cancel their policy.
If you sell your life insurance policy today, you will get a cash payment but you will no longer have the policy coverage.
What to Consider When Deciding to Get a Life Settlement?
So what’s the best choice for you?
Find out what are your yearly premiums from your current age moving forward. That should be a simple call to your life insurance carrier. Then add all the premiums you paid throughout the years and the premiums you will need to pay in the future. Are the future payments feasible for you? As the premiums increase, will you be able to pay them?
Then, consider the total amount of payments you’ll make versus the amount your policy will payout. If the total amount is too high a life settlement can be a good option for you.
Life settlements are also taxable, so when making your decision keep in mind that your payout will be subject to taxes. Finally, if you receive any government aid, it is important to know that your lump sum payment may impact any aid that you receive. It is good to double-check the requirements for your government aid before deciding if a life settlement is right for you.
Watch out For Aggressive Tactics
If you decided to get a life settlement, now you need to sell your policy. While the market is regulated, some companies might use aggressive tactics to push you to sell. This is a red flag. Don’t let brokers or agents pressure you into making a decision you’re not ready for. Even if you need the cash payout, taking your time will ensure you won’t get taken advantage of.
If the company or broker is forcing you to sell now, pressuring you, or being emotionally manipulative, it’s time to take a step back: get a broker, or replace your current broker if needed.
Having the right people on your side will also help you to maximize your settlement amount. It’s important to take your time with the research and with finding the right price.
So, Should You Get a Life Settlement?
A life settlement may not be the best option in the following cases:
- You need or want a life insurance policy
- You have beneficiaries who would be in dire straits without life insurance
- You depend on governmental aid that might be impacted by the transaction
- You don’t fully understand the processor need to conduct more research beforehand
- You are being pressured into selling the policy
A life settlement can be a great option for people who:
- Would allow the policy to lapse in any case
- Requires cash right away (remember, if you have a cash value in your policy you can always get a loan against that amount, but will still need to pay the premiums)
- Have no dependents that would rely on this life insurance
If you are thinking about a life settlement, it’s important to do your research and understand the consequences, so you can decide whether benefits outweigh the risks. Lastly, it is recommended to work with a trusted advisor. A licensed broker is your best bet, simply because a broker can get multiple offers from multiple companies as opposed to selling to one company that will give you only one offer.