The Life Insurance Settlement Options

Last updated on May 7, 2019 by Chris Granwehr in Life Settlements, Retirement Planning

An older couple sitting outside discussing life insurance settlement options.

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One of the benefits of universal life insurance is 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, premium 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%.

Could you still afford your life insurance premiums if the price went up 38%? If the answer is no, you’re certainly not alone.

If your life insurance premiums no longer fit your budget, consider selling your life insurance. Selling your life insurance for cash is known as a life settlement.

By selling your life insurance policy in a life settlement, you gain more than you would by surrendering your policy, and you can also potentially hold onto some of your policy benefits.

The greatest benefit of a life settlement is that you might find out that your life insurance may be worth a tremendous amount. If you sell your policy, you can opt for regular installments or a single lump sum payment. This is money that could be used to pay down debt, cover medical care, or improve your quality of life during retirement.

In this article, we will cover how life settlements work, the different life insurance settlement options, and how to choose which option is best for you.


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 receive is based on your:

  • Age
  • Health
  • Premium amount
  • Type of insurance
  • Policy size

A life settlement payout can range from 10% to 50% of your policy size and is always larger than the surrender value of a policy.

To give you an idea of what to expect, the average payout on a life settlement is 22% of the face value. That means a policy with a face value of $1 million could net you $220,000.

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

The three most common life settlement options are a standard life settlement, a viatical settlement, and a retained death benefit life settlement. In addition to the three settlement forms, there are different options to receiving your settlement payout, including a lump-sum payment, installments, life income, and more.

Traditional Life Settlement

A traditional life settlement typically happens when the insured is in reasonably 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 benefit life settlement allows you to maintain a contractual right to a portion of the death benefit, either instead 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 an excellent 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.

A woman on a swing learning about different life insurance settlement options.


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 first 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 and try to 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 (because they’ll no longer receive the death benefit). In this case, it might not be a good idea unless a retained death benefit life settlement provides enough coverage.

If your policy benefit needs are low, and you plan to surrender the policy anyway, it makes sense to check how much you can 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 essential to have a plan for what you’re going to do with the money you receive from cashing out a life insurance policy.

One thing to keep in mind is that the proceeds you receive from a life settlement may be taxable. Check out our post on life settlement taxation to learn more. If your proceeds are taxable, consult with a tax professional to make sure you set enough cash aside.

Once you’ve factored in taxes, determine the best ways to manage your cash. One way to do that is with a single premium immediate annuity.

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Chris Granwehr
Chris Granwehr
Chris Granwehr is the SEO Lead at Mason Finance Inc. He graduated with a B.S. in business administration from Penn State University.

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