When it comes to selling your life insurance policy, definitions can be a bit confusing.
If you’ve heard terms like “reverse life insurance”, “life settlement”, or “viatical settlement” but are unsure which is right for you, you’re not alone. However the reality is it’s a lot simpler than it seems.
At the core, the concept of all of these terms is transferring the death benefit your policy (in other words changing ownership) to a third party company, in exchange for an upfront payment. The simplest form of this is known as a “life settlement”, and refers to the transaction between the life insurance policyholder and whoever is purchasing it from them (often referred to as “providers”).
Often, “life settlement” and “reverse life insurance” are used interchangeably, however reverse life insurance can also be used as an umbrella term for the larger process of exchanging policies for monetary benefit . Other solutions under the reverse life insurance umbrella include Medicaid life settlements, which convert a policy into a secured benefit account to pay for long term care and life insurance advances, which give owners cash advances against the value of their policy.
The most common form of reverse life insurance (other than a standard life settlement), is what’s referred to as a “viatical settlement.” A viatical settlement is a special type of life settlement reserved for someone with a terminal disease. These typically are the highest valued policies – often 2 to 3 times more than a life settlement – as the policyholder has a limited life expectancy. Viatical settlements are typically used by individuals who need to pay for medical expenses now, so they choose to forgo the full value of the benefit in the event of their passing.
It’s important not to confuse the various forms of reverse life insurance with “cash value” (also known as “cash surrender value”), which refers to a value if you choose to give your policy back to the company that issued it to you. These values are fixed in the contract and are by definition less than a reverse life insurance, otherwise there would be no reason to sell to a third party.
Knowing which type of reverse life insurance to consider and how to get the most value for your policy is important to optimize your finances. If you feel like you understand what reverse life insurance entails, and think that it might be appropriate for you, check out our page on selling your life insurance or our life settlement calculator to find out what your policy could be worth.