What is a Retained Death Benefit Settlement?

If you have life insurance, you are making a smart decision for the long-term financial well-being of your family. But if you are like most Americans, you may find the financial stresses of daily living might make those life insurance payments difficult. That is where retained death benefits come into the picture.

If you’re struggling to make life insurance payments for any reason, you shouldn’t just stop paying and let your policy lapse. A retained death benefit allows you to lower your life insurance cost today in exchange for a portion of the death benefit in the future. This gets you immediate cash without giving up all of your insurance coverage.

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What are retained death benefits?

You, as a policy owner, have several options to keep your life insurance alive and get some value from your insurance. A retained death benefit (RDP) is a life settlement where you share a portion of your life insurance cost each month with an investor. In the event of a death benefit payout, the investor gets a portion of the payout, which is shared with your beneficiaries.

This arrangement allows the policyholder to retain a lot of value in their original policy while cutting the hardship of a monthly payment. Retained death benefit life settlement transactions are a win-win and can make sense in a variety of scenarios. Whether you are forced to take time off from work due to an illness, have enough savings to partially self-insure and want to cut your monthly costs, or have any other reason you want to lower your monthly life insurance costs, a retained death benefit life settlement may the ideal solution.

How retained death benefits work

If you think this type of life insurance policy adjustment makes sense for your needs, you have a few steps to get started. Typically, settlement transactions still offer a portion of the benefit to your loved ones and a portion to the investors. That means you need to find an investor.

The life insurance policy will stay at the same insurance company. The policy seller should connect with a high-quality life settlement provider that can handle the logistics of the transaction and even sell off its share in a secondary market. But all that matters to you is how much your cash payment will go down each month to keep your life insurance and how much your beneficiaries will receive in the event of a death benefit payout.

To price the transaction, the life settlement provider will generally look at things like your existing policy details, your life expectancy, and your goals with the transaction. In some cases, you may want to sell the entire life insurance policy for a cash payment today, giving up the future death benefit.

Because each retained death benefits transaction is unique, your settlement may look unique as well. In some cases, for example, you might stop making all monthly payments today in exchange for a reduced death benefit. As long as the investor sees an opportunity for an investment return, retained death benefits providers can find a way to make it work.

Before you sign any agreement, be sure to do your own background check on the buyer. It is important to assess the buyer’s financial stability so you can confidently count on the buyer continuing premium payments for the entire life of the policy.

Retained death benefits example

Let’s say you have a $1 million face value policy and a monthly payment that is too much to handle with your current finances. In an ideal world, the situation that put a strain on your finances wouldn’t exist. But sometimes things happen beyond our control. This example is for a term life policy. A settlement for a universal life, or whole life, would work differently.

A potential settlement might look like one of the following:

  • Stop all payments today and retain a $250,000 death benefit option for an irrevocable beneficiary
  • Stop a portion of payments today and get a reduced $450,000 benefit

Only sign on if you find a win-win that benefits you as well as the buyer. That’s what makes retained death benefit settlements work. Selling the entire policy is another option for a quick cash payment. If you have one, consider reviewing your retained death benefit offer with a financial advisor or other trusted expert to make sure it is in your best interest. They can also help you understand any tax consequences if you do transfer ownership in your life insurance.

Do retained death benefits make sense for you?

If you can no longer afford your life insurance payments for any reason, a retained death benefit settlement may be right for you. Most providers are willing to make a no-obligation offer, which you can accept or reject.

No matter the size of your policy, there could be a great opportunity for you to save today while keeping part of your death benefit for your loved ones in the future. That’s what retained death benefit life settlements are all about.

Eric Rosenberg
Eric Rosenberg - Updated November 2018
Eric Rosenberg is a personal finance expert residing in Southern California. He holds a BSBA in finance from the University of Colorado and an MBA in finance from the University of Denver. He has over a decade of experience writing about financial topics online. His work has been featured on Business Insider, Investopedia, The Balance, Investor Junkie, and a wide range of quality financial publications.
 

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