Selling Your Life Insurance Policy to Help Cover Expenses

The National Council on Aging reports that more than 17 million adults 65 and older are economically insecure. This equates to about one in every three seniors in the United States living with incomes at or below 200 percent of the federal poverty level. Rising housing and health care bills can burden seniors on fixed, limited incomes. In fact, data shows that the average 65-year-old retired couple will need $300,000 for health care expenses during their retirement years.

How Can a Life Settlement Help?

Life insurance is an asset that many older adults have. According to Vital Life, 57 percent of Americans aged 65 and older have life insurance policies. In 2019, life insurance companies paid beneficiaries $78.4 billion and supplied $88.1 billion in annuity benefits, per Forbes.

However, many life insurance policy owners do not think of their policy as an asset, per se. Likewise, they may not realize that they have the right to sell their policy to a third party.

The purpose of initially buying a life insurance policy is to provide a safety net of sorts for your dependents, should you pass away. A spouse, for instance, might establish a life insurance policy that will cover the mortgage if they die. This way, their surviving partner no longer needs to worry about paying off that debt on their own.

Later in life, some older adults may no longer consider this kind of coverage essential. Perhaps their spouse has already died, and their children are now adults who are financially independent.

In many cases, seniors who can no longer afford the premium payments may end up deciding to abandon their policy or let it lapse. In fact, more than 90 percent of life insurance policies today end without ever paying out a death benefit. As a result, seniors are leaving a staggering $200 billion in life insurance benefits on the table every year.

However, older individuals should keep in mind that they can instead opt to sell their life insurance policy through a life settlement transaction. They can then use a portion of the policy’s value to cover other expenses, such as long-term care services. The returns on life settlements can be significant. In 2021, individuals who took part in these transactions received payouts almost eight times higher than their policies' cash surrender value.

What Is a Life Settlement and How Do They Work?

When you sell your existing life insurance policy to a third party, you can receive a life settlement. This allows you to obtain a one-time payout that you may use to cover your expenses. The payment will be less than the full amount of the cash benefit but more than its cash surrender value. The average life settlement can range from 10 percent to 50 percent of the full benefit.

You can sell any type of life insurance policy as part of a life settlement transaction. This includes term life insurance, whole life insurance, or universal life insurance. Note that there is no fee associated with selling your policy.

In return for the payment, an individual or company becomes the new policy owner. The new owner is responsible for paying all premiums and receives the full payment upon your death. Once you sell your life insurance, you are no longer responsible for paying the premium.

Your intended beneficiaries are the ones who would face the downside of this transaction. This is because they will no longer receive the death benefit from the policy. As mentioned above, however, perhaps your beneficiaries are not as reliant on your policy as they may once have been.

Reasons People Sell Their Life Insurance for a Life Settlement

Obtaining a life settlement allows you to capitalize on your life insurance policy now. A life settlement can help you pay for your expenses, such as medical bills and long-term care.

If you are at risk of lapsing on payments, selling the policy allows you to avoid forfeiting it entirely. When you receive a life settlement, you will get more than if your policy lapsed or you surrendered it. Keep in mind, too, that many policies have grace periods for lapses in payment. Before giving up your life insurance policy altogether, check with the insurer to determine how much time you have to pay your premium before losing coverage.

As explained above, life settlements can also be beneficial if you no longer need a life insurance policy. For instance, if your spouse was your intended beneficiary, but your spouse passed away before you, you may no longer feel that policy coverage is absolutely necessary.

Considerations When Selling Your Life Insurance Policy

While selling your life insurance could help you cover your expenses, it may not be the best choice for everyone. Your age, health, and the terms of your policy can all affect how much you will receive from a life settlement. Consider the following points before making a decision:

• Before agreeing to a life settlement, contact your insurer to learn about all your options under your policy.
• Speak with a life settlement broker or life settlement provider. The broker can help you shop around and find the best settlement offer. Brokers typically charge 8 percent and must disclose their fees upfront. You may want to ensure that the broker has a license in your state.
• Consider alternatives to a life settlement, such as taking out a reverse mortgage on your home or using the cash value of your insurance policy as security for a loan.
• Review your outstanding debts, as creditors may attempt to take your life settlement.
• Speak to a tax professional about the tax consequences of acquiring a life settlement. You will likely have to pay taxes on the amount you receive.
• Take into account how the life settlement could affect whether you are eligible for government benefits, such as Medicaid. The settlement could constitute an asset that disqualifies you. (Learn more in this article about how much money you can have and still qualify for Medicaid.)
• The individuals who would have otherwise benefited from your life insurance policy may need to sign off on your life settlement. This is a requirement of some life settlement providers.
• Typically, a life insurance policy must have a minimum death benefit of $100,000 to qualify for a life settlement.
• If you are age 65 or older and have health issues for which you are seeking immediate care, a life settlement may be a good option for you.

The option to pursue a life settlement has been available since 2007. You may also take comfort in the fact that 45 of the 50 states have departments of insurance that carefully regulate the life settlement industry today.

Consult With an Elder Law Attorney

If you are considering selling your life insurance policy, consulting with a local, qualified elder law attorney is essential. They can help you determine whether a life settlement could benefit you. They may also be able to refer you to an experienced financial advisor for related issues. These professionals can also assist you in identifying strategies that allow you to maintain your policy and afford care.

For additional reading on life insurance, check out the following articles:

• What Types of Life Insurance Will Affect Your Ability to Qualify for Medicaid?
• Using Life Insurance as Part of Your Estate Plan
• Avoid Taxation on Your Life Insurance at Your Death