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Life Insurance Settlements: Frequently Asked Questions

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Many older adults find themselves with life insurance policies that are expendable and redundant after their dependents have become independent and financially secure. For these seniors, life insurance settlements can be a viable strategy to displace much of the costs of senior living.

What is a life insurance settlement?

A life insurance settlement, or life settlement, involves selling a life insurance policy to a third-party investor before the policy-holder actually passes away. The policy-holder surrenders the death benefit to the investor in change a payment. This payment may be a single, lump sum, or a monthly series of monthly payments.

Who funds a life insurance settlement?

There are numerous life settlement providers, many of which can be found with a quick online search. People who are considering a life settlement have an opportunity to get quotes from numerous buyers in order to choose the most advantageous option.

How much does a life settlement policy pay?

Life settlement are usually lump sums in an amount that’s more than the surrender value of the policy but less than the full benefit of the policy. The amount of the lump sum will be based on the calculated life expectancy of the policyholder. In other instances, seniors may exchange their life insurance policy for a monthly benefit to offset the cost of senior care. Either way, a policyholder with a longer life expectancy–according to complex life expectancy probability formulas–will receive a smaller settlement than a policyholder who, theoretically, has fewer remaining years.

 

Why would a senior choose a life insurance settlement?

When seniors or their families are faced with the senior care, they may find that their budget is a little shy of what’s required for their desired senior community. In cases like this, a life settlement policy can be invaluable.  Some life settlements–called long-term care benefit plans–are even structured in a way that directly offsets the costs of senior care on a monthly basis.

Another motivation for selling a life insurance policy is the cost. Life insurance policies can become an unnecessary and burdensome expense, particular when they involve premiums that increase with age.

Regardless of whether the settlement is a lump sum or a monthly benefit, the decision to sell a life insurance policy amounts to a difficult sacrifice for some seniors. Yet, very often, these policies have outlived their usefulness and are cashed-in without reluctance.

Is there still a monthly premium?

The investor is responsible for the monthly premium after purchasing a life insurance policy.

Are life settlements taxable?

Generally, only the portion of the life settlement that exceeds the premiums paid over the lifetime of the policy is taxable. This portion of the settlement is taxed as regular income. For instance, a if you sell a life insurance policy for $100,000 and you have paid $60,000 in premiums since the policy began, you will pay taxes on $40,000.   

Are life settlements on the up-and-up?

As the policyholder, your life insurance policy is considered personal property, and you have the right to choose a beneficiary, change a beneficiary, sell your policy, or borrow against your policy. In other words, what you do with your life insurance plan is your business. As always, you’re encouraged to verify the reputation of any investors you consider working with, and to consult with a financial professional before making any life changing financial decisions.

 

Jeff Anderson is a freelance writer specializing in senior finance. To read more articles by Jeff, visit www.milestoneretirement.com.