Chapter 7: Life Settlement Alternatives
What are my alternatives to a Life Settlement?
A life settlement can be very attractive way to tap into an asset that you own. However it is important to be aware of alternatives to a life settlement – we’ve compiled a short list of these alternatives in this chapter.
Consider them carefully before moving forward.
Accelerated Death Benefit
The most common of alternatives to a life settlement is known as an Accelerated Death Benefit (ADB). An ADB, also called “Living Benefit”, allows you to receive a portion of your death benefit from your insurance company. However, your insurer may have certain requirements for you to qualify – such as having to be terminally ill which usually implies a life expectancy that is less than two years.
Also note that you can’t stop paying your premiums even after receiving your ADB. You are still required to make your policy’s premium payments while you receive portions of your benefits which will be considered as a loan you won’t have to repay. Insurance companies will deduct Accelerated Death Benefits from your policy’s face value when you pass away.
We introduced viatical settlements in the first chapter of this guidebook. Like ADB, a viatical settlement is meant for terminally ill policy holders. However, unlike ADB, you can receive a lump sum settlement upon the sale of your life insurance policy to a third party. You are therefore no longer required to pay the monthly premiums.
Policy Cash Value / Death Benefit Loan
If you are a whole-life policyholder, you may tap into the cash value has built up in your policy over time. You can either borrow against your policy’s cash value or use it as collateral for secured loans.
A Death Benefit Loan means borrowing against your policy’s cash value. When the death benefit is due, your insurer deducts the loan amount, its interests and other fees from the full death benefits.
Note however that you cannot take out as a loan more than the cash value of your policy, which is typically a small fraction of your benefit.
Policy Surrender Value
If you do not intend to own your policy any longer, you can cash it for its surrender value. This amount is usually significantly lower than a life settlement.
Remember not to treat your life insurance policy as a long-term commitment that you need to pay rather than an investment that has the growth potential like any other property you invest in. Your policy is an investment, a convertible asset, and can be a significant part of your net worth.