You’re Struggling to Maintain Your Premium Payments
One common motivation to sell your life insurance policy is the premium payments attached to it. If you’re struggling to pay your premiums or can no longer afford to do so, selling the policy can be an effective way to get a financial boost while also alleviating yourself of future payments.
According to the Insurance Information Institute, your policy may lapse if you stop paying premiums, leaving you with nothing.
Your other option is to surrender the policy to the company that issued in it exchange for cash, since some types of policies have a cash surrender value.
However, if you are eligible to sell your policy, your payout from a life settlement typically can be more lucrative. This is because the third party interested in buying the policy may offer you more than the surrender value to convince you to sell the policy instead of surrendering it.
Emergency Financial Needs and Settling Debts
If you are hit with an unexpected expense or financial emergency, a life settlement may be one of your only options to get immediate cash.
In an emergency situation, you can sell your policy for a lump sum payment to help with whatever issue you are facing.
Similarly, some people may pursue a life settlement as a way to settle debt. If you have outstanding debt and do not have the money to pay it, then you could opt to sell your policy and put the payout toward your debt.
Even if you have some money, the main benefit of opting for a life settlement to pay off debt is not having to dip into your existing finances to do so.
Depending on the value of your policy, you could also possibly receive a large enough payment to pay off all of your debt at once.
You No Longer Need Your Coverage
Another common reason that people consider selling their life insurance policy is that they no longer need the coverage.
For example, you may have originally sought a life insurance policy because you had a spouse and wanted a policy as security in case something happened, and you are now divorced. Or you may have needed the policy while you had young children, but they are now grown and don’t need that security. Or your beneficiary may have passed away.
In any of these situations, it may make sense for you to sell your policy. Doing so allows you to cash in on a policy that you otherwise would not benefit from. It also offers a way to no longer have to pay premiums on a policy that you don’t need.
Remember that the payout you receive in a life settlement will typically not come close to equaling the amount of the death benefit. Third party companies that purchase policies do so with the hope of making a profit off the death benefit when you die. So the lump sum you are offered will likely fall between the cash surrender value and the death benefit.
Paying for Medical Expenses and Long-Term Care
Medical expenses or dealing with long-term care can be major issues for many Americans. A specific type of life insurance sale caters to individuals dealing with these issues.
Known as a viatical settlement, it works similarly to a life settlement but is specifically for those who are terminally ill. This usually means that you have less than two years to live.
How a Viatical Settlement Differs from a Life Settlement
- Only available to those who are terminally ill
- Not taxable
Opting for a viatical settlement can provide you with immediate cash to help pay for your medical expenses and care and prevent you or your family going into debt.
Viatical settlements have the additional benefit of generally not being taxable, which is different from life settlements.
If you are terminally ill, you also should check to see if your policy has a terminal illness rider or if you are eligible for an accelerated death benefit before opting for a viatical settlement.
Paying for Final Expenses
Final expenses can be a major financial burden. According to the National Funeral Directors Association, the median cost of a funeral in 2021 was nearly $8,000.
If you are struggling to handle the final expenses of a family member, then selling your life insurance policy could be one way to get a lump sum payment to help you cover those costs. However, please note that selling your policy in order to have cash to cover your own final expenses does not make sense. That’s because when you die, your beneficiary receives the death benefit of your policy, which is almost always worth more than any payout you would receive in a settlement.
Unless you need the money immediately or for someone else’s final expenses, relying on the death benefit would likely make more sense.
You Want Cash Now
Simply put, there may not be one specific expense or issue that is troubling you. You just want cash now. The payout from a life settlement offers that as it does not have to be used for specific things or go towards certain areas. You can use it however you see fit.
But before making the choice to sell your policy, you should be aware of all that it entails. First off, you will likely have to pay taxes on your payment. This is not the case if it is a viatical settlement, but that is an option only available to those who terminally ill.
And you should also be cognizant of the money you are leaving on the table. Life settlements are often worth just a small portion of the policy’s death benefit. You would receive immediate cash, but your family or beneficiary would receive nothing when you die.
Read More: Life Settlement FAQs
