By: Emily Ferreira, Managing EditorMany people fear that life insurance will require a considerable premium. Regardless of the cost of life insurance, it is best viewed as an investment into the future of you and your family. In the event that an individual passes away, any life insurance should provide enough money to cover funeral costs, and the better life insurance policies also leave an additional sum of money that will help a family survive and recover from the unexpected death of a loved one.
In addition to the designed purpose of a life insurance policy, other advantages can be received, depending on the life insurance policy selected by the consumer. For example, a person may receive dividends and cash benefits. In times of financial hardship, a life insurance policy can even be sold for its “cash value”. This type of transaction is referred to as a life insurance settlement.
Understanding Life Insurance Settlements
In the event that a person’s needs have changed and a life policy is no longer needed, the policyholder may cancel and receive cash benefits based on the life insurance policy’s current worth.
There are two ways that a policyholder could cash out on their life insurance. First, the insured could sell their policy back to the life insurance company for its cash value. Second, the life insurance policyholder could sell their policy to an investor or investment company.
Circumstances That Could Make Life Insurance Settlements More Attractive
There are many ways a person’s life can change, making his or her life insurance policy seem less important. Death, divorce, or estrangements are all events a person could name as reasons to discontinue a life insurance policy.
If a parent purchased life insurance for the purpose of leaving something to their child, and the child passes away unexpectedly, then the insurance may lose its value for the policyholder.
Financial hardship could make the cost of the life insurance premium difficult to maintain. Rather than to let a life insurance policy expire due to the failure to make payments at the current life insurance rate, the policyholder could undergo a life insurance settlements and sell the policy for cash value. This individual may in some cases reinvest some of his or her cash value into another life insurance policy that is more affordable on their budget.
A serious illness may occur, causing a person to have to make medical payments instead of life insurance payments. In this scenario, the policyholder could get a life insurance settlement and sell their life insurance policy to an investor for a large amount of money. The investor would then be reimbursed when the policyholder passes away.
For example, a 68 year-old widow might suffer from a debilitating illness that diminishes her ability afford to live comfortably on her retirement, due to increasing medical expenses. She might turn to her life insurance policy for assistance. While some policies do provide their owners with annual dividends, if the payout is not high enough, it might be financially prudent for her to sell her life insurance policy.
If this woman has a $750,000 life insurance policy, a group of investors might offer to pay her $500,000 for it. After accepting the offer, she would receive her payment and rename the investors as the beneficiaries of her life insurance policy.
This allows the elderly woman the opportunity to continue to live comfortably, hopefully for the rest of her life. The investors simply have to wait for her death to receive the benefits of her life insurance policy, permitting them to make a handsome profit of $250,000, minus the cost of maintaining her life insurance policy.
The Down Side to Life Insurance Settlements
While the example in the previous section might seem like an ideal situation for everyone involved, there can be some drawbacks to selling a life policy. Most people do not buy these life insurance policies to directly benefit themselves.
Life insurance is designed to financially provide for those left behind, or at the very least, to provide enough money to pay for a burial and any other debts. If a life insurance policy is sold, family members may be forced to cover all of the remaining debts themselves. Funeral costs are very expensive, so this could be very hard on the remaining family members.
Many people do not like the idea of leaving their children in a difficult situation. They work hard their entire lives, so they can provide for the well being of their children. They even buy life insurance to provide for their spouse and children after they have gone. But, things do not always work out the way they are planned.
If a policyholder can set up a new life insurance policy under a more affordable life insurance rate, then the individual can benefit from the life insurance settlement while still offering protection to their families. But, most people who feel financially pressured into selling their policy back to the life insurance company or to an investor may also feel that they are not in good enough health or financially stable enough to enter into a new life insurance contract.
For the person who sells their life insurance policy, if they have enough proceeds from the sale, they may wisely choose to pre-pay their funeral expenses to ensure that their family will not have to raise the money to cover that cost unexpectedly.
Who Should Get The Most Benefit From A Life Insurance Policy?
People typically purchase life insurance policies early in life. They pay their premiums for most of their lives. If they are unable to continue paying their premiums as they age, their policies may eventually lapse.
Lapsed life insurance policies are ideal situations for life insurance companies, in that the insurance company will have received years of premiums and then they will never have to make the big payout at the end of the road. These lapsed insurance policies become “pure profit” for the insurance company.
If the policyholder chooses to take a life insurance settlement, then the policyholder and their family will benefit from the value of the insurance policy instead of the insurance company. When faced with the possible lapse of a life insurance policy, it is always advisable to seek the life insurance settlement.
Final Thoughts
If you are unable to continue paying the premiums on your life insurance, it will always be to your benefit to seek the life insurance settlement. Your investment should benefit you, instead of the insurance company’s stockholders.
If you still want to leave something behind, put the money you receive in a savings account and leave it for your heirs. They might not have the benefit of a tax-free inheritance, but they will still gain from your hard work and sacrifice.
If your loved ones are no longer an issue, then saving money for them will not be necessary. Using the profits from your life insurance settlement could improve your final years.
It is just wise to consider all of the options available to you, before selling an investment that you have put a lot of time and money into building for yourself.
If you do decide to go ahead and sell your life insurance policy to cover your current medical expenses, or to keep it from lapsing, be sure to shop around for the best offer. You do not want to sell your life insurance policy for less than it is worth. Finding a proper life insurance settlement offer can be as easy as getting multiple life insurance quotes and choosing the one that offers you the greatest reward.
