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What is a Life Settlement?
Few people really understand what a life settlement is or how it works. The term refers to cashing out a life insurance policy in a particular way. It is not simply taking the cash value, although that is an option.
Nowadays, a life policy that the owner no longer needs or wants can be liquidated by a company which specializes in these types of settlements. The amount you can receive is based on the face amount of the policy, your current age and life expectancy, and a few other factors. The settlement will be more than the cash value, though. Otherwise there would be no point. There are fees associated with life settlement.
The money you receive can be used for anything you want. You have exchanged your policy for cash, simple as that.
Here are six facts you need to know if you own any type of life insurance.
A Life Insurance Policy is an Asset
A life insurance policy is considered a legal asset. That means the owner has the right to assign it to someone else or sell it, among other things. Here we are concerned about selling the policy. You have been paying premiums all along, and now have the opportunity to receive cash in exchange for the policy. It is no different from selling stocks or property you own.
Billions of Dollars Worth of Life Insurance is Abandoned
Many older policy owners abandon their policies every year because they can no longer pay the premiums. They do so out of ignorance of this program that would put money in their pockets.
A study by Conning and Company found that seniors own some $200 billion in life insurance death benefits. Most if not all of these policies are eligible for life settlement or some other type of living benefit.
This option is almost never taken advantage of, and thus policy owners are robbed of their rightful remuneration. This is why advisors need to be vigilant in informing their clients about life settlements.
Life Settlements Can Pay for Care
If you are struggling with how to pay for long term care, whether at home or at a facility, a life settlement can provide an answer. As the policy owner becomes older and experiences failing health, the more valuable the life insurance becomes as an asset to be purchased. You needed to be very healthy in order to purchase the insurance, but now that your health is declining, the policy can pay you back for all those years of paying premiums. You can use that money while you are living.
Any Type of Life Policy Can be Used
Term, whole life or universal life insurance can qualify for a life settlement. The death benefit can vary, but in general, companies are looking for $100,000 or greater death benefit in order to purchase the policy. The owner ideally would be greater than 70 years of age, and have a premium to death benefit ratio of 5% or less.
Settlement Funds Can be Tax Free
If the policy owner is terminally ill or even chronically ill, the money received from a life settlement can be exempt from federal tax. Even if this were not the case, any money received that is less than the funds paid into the policy would not be taxable. Over the amount paid in, funds received would be taxed as capital gains. Please check with your tax advisor to verify before proceeding.
Exchange Death Benefits for Living Benefits
Life insurance is generally bought to protect a family from financial harm due to the premature death of one or both of the breadwinners. Later in life, when that protection is no longer needed, other dangers surface.
Some of these dangers are declining health, need for retirement funds, or need for a smaller final expense policy.
A life settlement can be the answer to a great many challenges of aging, as you have seen. When money is needed, consider the financial asset you have in your life insurance policy.