Derive Cash Benefit from a Life Insurance Policy [Guide]
At the time when an individual consults with his family and purchases a life insurance policy, he is often doing the wisest thing possible to protect his loved ones. But the reality is that the necessity of life insurance can diminish over time, especially as the circumstances of the beneficiary change or the premiums become burdensome in the policyholder’s retirement years.
Someone who realizes that he no longer needs his insurance policy could just continue to pay the premiums indefinitely, but rather than maintain the status quo he can also initiate a transaction that will ease the burden and provide a financial payout in exchange for his policy. The primary options for cashing out an unwanted life insurance policy are as follows:
- Receiving the cash surrender value of the policy
- Giving the policy to a beneficiary
- Selling the policy in a life settlement
Seniors in this situation have several options, and a family can determine the right one for them based on the details of their policy, their health condition and the wishes of their beneficiaries.
What you will learn:
Cash Benefit from Existing Policy
When a policy owner makes premium payments to a whole life or universal life insurance policy, a portion of those payments accumulate as cash value and the rest goes to the death benefit of the policy. Cash surrender value is essentially the value of the money the individual has put into the policy, with a few variables like the performances of the markets in which the insurance company invested the money and the subtraction of fees charged by the agency.
In some cases, a policy owner finds that it is the most beneficial route to cash out all of part of a policy to help provide funds right away. If an individual still wants to retain part of the death benefit, he can redeem a portion of the cash surrender value, but if he no longer needs the policy at all he can surrender the policy for all of the amount. It is important for anyone pursuing a profitable conclusion for a life insurance policy to understand, however, that the cash surrender value might not be the most profitable choice.
For a senior who is struggling to pay the premiums of a policy but still wants the death benefit to be available to a beneficiary, transferring a policy to someone else could be the answer. It makes sense to transfer ownership of the policy to the beneficiary, who can then assume the premium payments and control of the policy. The process of passing a policy from one person to another is fairly straightforward, and a life insurance agent can walk both parties through it. But because of tax implications, the timing of such a transfer could be crucial.
If an individual transfers a policy and then dies within three years of the transfer date, that product is still considered to be part of the original policy owner’s estate for tax purposes. If the transfer is designed in part to mitigate the tax burden of the insurance payout for the new owner, the person doing the transferring might want to make that move while he or she is still relatively healthy.
Selling a policy in a Life Settlement
In a life settlement, the owner of an unwanted life insurance policy sells it to a third party for a cash payout. The buyer assumes premium payments of the policy and receives the death benefit when the original policyholder dies. If you are a candidate for a settlement, you could yield a payout that is significantly higher than the cash surrender value of the life insurance.
The two chief variables that determine suitability for a life settlement are the impairment level of the policyholder and the cost structure of the original policy. Generally speaking, the more serious the health impairment, in inverse relation to a more favorable rating when the policy was issued, creates the best situation for a profitable life settlement. For example, if a universal life policy was issued at preferred-plus and the policy holder becomes significantly more impaired than predicted, a life settlement could yield sums up to four times the stated cash surrender value.
The Bottom Line
The surrender of a life insurance policy for the cash value is generally the first option most people consider because they are the most familiar with it, but a careful policyholder should gather all of the facts before acting. Depending on a number of variables, a senior looking to unload a policy that has become a liability might be better off transferring ownership or pursuing a life settlement, but only a thorough inquiry into all three paths will lead to the optimal decision.
Magna Life Settlements, one of the nation’s leading life settlement brokers, stands ready to advise policy owner or agents on the settlement process and the suitability of settlements for specific individuals. Use our simple life settlement calculator today to determine whether a settlement might make the best use of your policy.
*Comments provided in this blog post are for informational purposes only and should not be construed as financial, legal or tax advice, recommendations or solicitations. Please consult your financial, legal or tax professional with questions related to the information presented, or for advice as to whether a life settlement is right for you.