If you have universal life insurance, one of the benefits you get is having extra flexibility with your premiums. But the downside to that flexibility is that the insurance company can raise your premiums if your cost of insurance increases.
In some cases, those increases can be financially crippling. For example, Transamerica made the news in 2016 when it increased premiums on its universal life policies by a staggering 38%.
If you find that your life insurance premiums no longer fit your income or your budget is getting too tight to be comfortable, consider selling your life insurance, also known as a life settlement. You will find the life insurance settlement options listed below.
By selling your life insurance policy in a life settlement, you not only stand to gain more than you would by surrendering your policy, but you can also potentially hold onto some of your policy benefit. Your life insurance may be worth a tremendous amount.
How Life Settlements Work
In a life settlement, you sell your policy to a third-party company or investor who is not the original provider of the policy. The cash amount you’ll receive in the sale is typically based on your:
- Premium amount
- Type of insurance
- Policy size
To give you an idea of what to expect, the average payout on a life settlement is 22% of the face value. In that case, a policy with a face value of $1 million would net you $220,000.
That said, the payout can range from 10% all the way up to 50% of your policy size. The exact amount is determined by the type of policy you have and your life expectancy.
When you engage in a life settlement transaction, the company or investor takes over your contract with the insurance company and the payment of your premiums, and they’ll eventually receive the policy benefit upon your passing.
In return, you can receive up to 26 times more cash than you would if you were to surrender your policy and get the cash value.
The Different Life Insurance Settlement Options
There are a few different types of life insurance settlement options that you should understand: traditional life settlements, viatical settlements, and retained death benefit life settlements.
- Traditional life settlement A traditional life settlement typically happens when the insured is in fairly good health and doesn’t have an immediate risk of death.
- Viatical settlement A viatical settlement is a type of life settlement that happens when the insured is terminally ill. The idea is to sell your life insurance policy in exchange for cash to help pay your medical bills and treatment costs to help you fight the illness.
- Retained death benefit life settlement A retained death benefitlife settlement allows you to maintain a contractual right to a portion of the death benefit, either in lieu of a cash payment or in addition to one.
Depending on your needs, you may even be able to design your settlement to include an increasing death benefit.
A retained death benefit life settlement is a great option if you don’t want to keep paying premiums but still need a death benefit, or you need cash now but still want to provide some protection for your loved ones.
Who’s a good candidate for a life settlement?
The best candidates for the life insurance settlement option are people who are 65 and older and have a policy with a face value of at least $100,000.
Other factors that make you a good candidate include:
- You can no longer afford your policy, either due to budget constraints or increasing premiums.
- Your need for the policy benefit is either gone or significantly lower than when you bought the policy.
- You’re already thinking about surrendering your policy to get access to the cash value.
To understand if the life insurance settlement option is a good fit for you, take a step back and consider your situation objectively. Understand the advantages and drawbacks of your decision.
For example, let’s say getting rid of the policy through a life settlement puts your loved ones at risk if you die. In this case, it might not be a good idea unless a retained death benefit life settlement provides enough coverage.
But if your policy benefit needs are low and you plan to surrender the policy anyway, it always makes sense to check how much you would gain from a life settlement instead of surrendering the policy.
What to do with your life settlement payout
Once you get an idea of how much you’ll receive in a life settlement, it’s important to have a plan for what you’re going to do with the money.
One thing to keep in mind is that the proceeds you receive from a life settlement may be taxable. You can check out our on post life settlement taxation. Consult with a tax professional to make sure you set enough cash aside and avoid a surprise.
Once you’ve done that, start considering the best ways to manage your cash. One way to do that is with a single premium immediate annuity.
Discover your policy value in seconds:
Single premium immediate annuity
An annuity is a financial product that entitles you to receive a certain amount of money each year, usually for the remainder of your life.
With a lot of annuities, you contribute money during an accumulation phase. Then when you annuitize the account, you start receiving regular payments.
A single premium immediate annuity, however, dispenses with the drawn-out process. Instead, you make one payment and start getting payments immediately.
What’s more, if the money from the life settlement has already been taxed, your annuity disbursements will be tax-free aside from any interest you earn on the account.
A single premium immediate annuity is a good option if you need some cash now but want the security associated with income for the rest of your life.
If you have other needs or goals, or simply want to know all your options, work with a financial advisor to see other ways to put your life settlement proceeds to good use.
Life Settlement Options When You Die
- Interest Income option When selecting this option, the beneficiary will have the capability to get a portion or all of the proceeds when needed. Typically, this option is used for people who do not need access to the funds until later in the future (i.e. a child’s college tuition.)
- Life Income option This option guarantees the beneficiary an income for the rest of their life, however long that may be. The amount depends on the total of the policy death benefit along with the life expectancy of the beneficiary.
- Joint and survivor life annuity option The ability to annuitize the death benefit between two or more individual lives. Payments would be decided determining the life expectancy of the beneficiary who is expected to live longer. This will continue until the last beneficiary has passed away.
- Specific Income Option This allows the beneficiary to receive an equal measure of income on a yearly basis. There are times when people pass away prior to exhausting the payout benefit, if this happens another person can be selected to receive the payments until the payout is complete.
- Fixed Period option The fixed period option to pay out both an amount of principal plus interest to the beneficiary during a stated time frame. If the primary beneficiary dies prior to all of the proceeds being paid, the proceeds will be paid to the contingent beneficiary who was previously determined on the policy.
- Fixed Amount Option The fixed amount option the death benefit proceeds will be given out in a fixed amount over time until both the principal and the interest have been totally paid out to the beneficiary. the recipient (beneficiary) has the option to either increase or decrease the payment amount – and if they prefer, they could even change to a completely different settlement option entirely.
Looking towards the future
Insurance carriers will continue their efforts to limit access to information around alternatives to lapsing or surrendering life insurance policies. But we can work to make these anti-consumer practices disappear for good.
In 2016, the state of Georgia was the first state to pass a law that prevents life insurance companies from terminating, penalizing or otherwise silencing life insurance agents who inform consumers of their life settlement options.
Across the country, several lawsuits have been filed by individuals against their insurers over failure to disclose alternatives such as the life insurance settlement option to lapsing or surrendering a policy.
In California, a lawsuit filed in January 2016 alleges that concealing life settlement options is a common practice by the life insurance industry. This lawsuit should help drive legislative change in the near future.
Life settlements aren’t for everyone. But they’re a good option to consider if you’re planning on getting rid of your life insurance policy, either because of increasing premiums, budget issues, or changing needs. Ultimately, the life insurance settlement option can offer you a better return than if you were to just surrender the policy.