A life settlement is the sale of an insurance policy, usually life insurance, to a third-party. In a life
settlement transaction, insurance policies are usually sold for more than the cash value but less than the
death benefit. A life settlement may be a good decision for some policyholders who no longer want or
need the policy. But, for others, there are some drawbacks. First, let’s look at the benefits.
Pros of Life Settlement
You receive a cash benefit from the policy. The primary reason that you would sell a life insurance policy
is to receive the cash from the sale. You may need the money to pay for more important expenses, like
health care or large debts. If you have a large life insurance policy, you may be able to sell part of the
policy to a life settlement company and keep the other part for yourself. Check with your insurance
company to see if there are any minimum policy amount restrictions.
You can receive relief from expensive premium payments. As you get older, the monthly cost of life
insurance tends to increase. If you are no longer able to afford your insurance premiums, you could take
a life insurance settlement, receive the cash benefit, and no longer be responsible for monthly payments.
The policy has or is about to lapse. A life insurance policy lapses when you
stop making payments. A life settlement company may offer you some cash
for the policy and keep it from being cancelled by resuming payments for you.
You can receive a cash benefit where you otherwise would not have received
anything because the policy would have cancelled.
Cons of Life Settlement
Your family members will not receive a death benefit from your life insurance.
Once you’ve surrendered the life insurance policy, the life settlement company
gains the death benefit. If you don’t have other savings or life insurance to
cover your debts and burial expenses, your family may have to pay those
expenses from their pockets.
The life settlement industry may be unregulated in your state. That means
life settlement companies and brokers have few rules to follow regarding
disclosures. Your state’s Insurance Department may not be able to provide
you with assistance if you have a complaint about a life settlement company
There may be tax implications. Depending on the amount of premiums
you’ve already paid, your settlement amount may be subject to income taxes.
Any amount you receive over the cash surrender value is subject to taxation.
This is a significant consideration, as you may be sacrificing the potential
tax-free benefit payable upon death. Depending on your other income, the
settlement could push you into another tax bracket, increasing the amount of
income taxes you owe. Contact a tax professional for more information about
how a life settlement would affect your taxes.
You lose any benefits associated with the original policy including the ability to
borrow against the policy, cash out the policy, use the policy as collateral to
secure a loan, or leave a tax free death benefit to your loved ones.
You may be contacted periodically by the life settlement company to check on your health status. The life
insurance settlement company may require you to sign a waiver with your doctor or hospital allowing
them to release your medical information. Other third parties including lenders and investors may have
access to that information.
Life settlement agents don’t have to be trained or licensed in certain states. There are no federal laws
regulating life settlements. Not all states have laws regarding life settlement, so you may be left with little
recourse if a life settlement company takes unfair advantage of you. To find out whether your state has
laws governing life settlement, check with your state’s insurance department.
Should You Sell Your Policy?
If you’re considering selling your life insurance policy to a life settlement company, make sure you
examine both the pros and cons of the decision. If you get rid of your life insurance, you might receive a
cash benefit today, but make sure your family’s financial needs will be taken care of when you’re no
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Life Settlement Pros and Cons
If you're considering a life insurance settlement
there are a number of important factors to keep in
mind. Life settlements aren't for everyone, so weigh
both the pros and cons.