As we age we take on more responsibility – and financial responsibility is no exception. The older we get, the more complex our financial obligations become, which means that we need to consider additional factors when making financial decisions for our futures and those of our loved ones. There are several questions we need to ask ourselves: should I even have a mortgage in retirement? When the time comes, should I take my pension in a lump sum? What kind of life insurance policy should I set up? Is a life settlement suitable for me?
This guide will aid readers in answering the last question by outlining the key things to know about life settlements, when it is advisable to execute a life settlement, important considerations, and the associated implications on a person’s financial well being.
What Is a Life Settlement?
A life settlement is the sale of an existing life insurance policy to another party for a one-off cash payment. With life settlements, the payment is more than the cash surrender value but less than the actual death benefit. Once the transaction is complete, the buyer becomes the beneficiary of the policy, meaning they become responsible for all premium payments and they receive the death benefit when they die.
What Is the Difference Between a Life Settlement and a Viatical Settlement?
Life settlements are sales that any life insurance policy holder can make, whereas viatical settlements are arrangements in which a terminally ill person sells their life insurance policy at a discounted rate in exchange for a one time cash payment. The buyer becomes the new owner of the policy and cashes in the benefits when the original owner dies.
Viatical settlements can be extremely risky because there is a great deal of uncertainty involved (i.e. the buyer has no way of knowing exactly when they will be able to cash in the benefits of the policy because there is no way of knowing exactly when the original owner will die). There may also be costly tax implications for the new owner.
What Types of Life Insurance Are Eligible for Life Settlements?
All types of life insurance policies qualify for life settlements; however, some policies may be more lucrative than others.
Why Choose a Life Settlement?
There are a variety of reasons for which an individual might choose to sell their life insurance policy to a third party. Some of the common reasons include:
- The initial holder can no longer afford to pay the policy premiums
- The initial holder may no longer need the policy
- In the event of an emergency (i.e. if the initial holder needs money urgently, they may decide to sell their policy to come up with the cash in a hurry)
What Are the Benefits of Seeking a Life Settlement?
There are a few key benefits of life settlements. The main perk of selling your life insurance policy to a third party is that you receive a lump sum of cash, which is especially helpful if you urgently need funds. There are also no conditions on how you use that money; this type of transaction gives you complete freedom and autonomy to decide how you use it. Another benefit is that a life settlement can potentially help you grow your investment profile, which can boost your overall financial standing.
Are There Reasons to Not Seek a Life Settlement?
According to Windsor Life Settlements, there are some potential drawbacks to life settlements. It’s important to be mindful of these before purchasing one. Some of these dissuading factors include:
- Creditors may seize the policy’s benefits
- A life settlement can be taxed as income
- The new beneficiary may outlive the added cash
- A life settlement eliminates the financial benefit for beneficiaries
Given that you, as the new beneficiary, may outlive the added cash, there is a possibility you will not see the financial gain you might have planned for. Additionally, the tax ramifications could be extremely costly depending on your circumstances, which could also greatly impact your financial well being. In many ways, deciding whether or not a life settlement is the right fit for you is a matter of balancing your money and your life. In other words, it’s incredibly personal, which means that determining the suitability of a life settlement is a personal decision only you can make for yourself. However, it’s vital to be as informed as possible when making this decision to preserve your financial wellbeing. In educating yourself on life settlements, the pros and cons, and important criteria to consider before purchasing one, you will enable yourself to make the best decision possible.