Unclaimed Cash in Your Life Insurance Policy
For seniors facing mounting healthcare bills and other unexpected retirement expenses, sometimes cash is needed very quickly. But short of a winning lottery ticket or a mythical money tree in the backyard, where would those hidden funds come from? The surprising answer: from a life insurance policy.
Many seniors will surrender their life insurance policy for cash value, but in many cases they opt to let a policy lapse and receive no value because they are unaware that a life settlement would be more profitable.
It’s common, as life insurance policies age, for the policyholders to reach a point where the beneficiary no longer needs the payout or for the premiums to increase. But years of investing in those policies don’t need to be waste by lapsing. To discover the cash value hidden in a life insurance policy, it’s vital to understand the process of a life settlement, the potential tax consequences, and the different ramifications for universal versus term life insurance.
How a Life Settlement Works
In a nutshell, a life settlement is a transaction that occurs when an individual over 65 sells his or her life insurance policy to a settlement provider for cash, usually yielding considerably more than the surrender value of the policy. The policy owner receives money to cover expenses, and the settlement company takes over the payment of life insurance premiums and receives the death benefit upon the death of the insured. For example, if a person was holding a universal life policy with a face value of $1,000,000 and annual premiums of $35,000, that policy might yield about $300,000 in a life settlement— depending on the health status of the insured.
Settlement payouts are determined by several variables, most prominent, are the health of the insured and the price structure of the policy. Not every situation is ideally suited for a settlement, but anyone hanging onto an unwanted policy should investigate the possibility that a higher yield maybe possible through settlement than through surrender.
Seniors who are eligible for settlements often wonder how long it takes to sell life insurance policies. The first step is for a life settlement provider like Magna Life Settlements to determine a policy’s eligibility. Then the process included submission of required insurance documents and medical records, after which a formal settlement offer is extended by the provider to the policy owner. Typically the sale process takes a few weeks, but it can be longer depending on how quickly the insurance carrier can process the change of ownership and beneficiary forms. If retirement costs are mounting, a life settlement can be a quick and simple means to a cash infusion to those unexpected bills.
Life Settlement Tax Implications
Before entering into a settlement an individual needs to understand how a settlement is taxed and how the tax bill has made such transactions more advantageous for the consumer. The proceeds from a life settlement are subject to three different tax classifications:
- Sale proceeds up to the tax basis (the total amount paid in premiums over the life of the policy) are free from taxation.
- Proceeds that exceed the tax basis but fall short of the cash surrender value are taxed as ordinary income tax rates.
- Proceeds above and beyond the surrender value are subject to capital gains tax rates.
The higher the cost basis for a policy, the larger the untaxed amount of the settlement will be, which is why one specific provision of the 2018 Tax Cuts and Jobs Acts was particularly welcome for consumers looking to sell their policies. The new law allowed consumers to make the best decision for their situation without concern about assuming an extra tax burden.
Which Type of Policy Works Best for a Life Settlement?
Many policyholders invest in term life insurance initially because of its affordability and flexibility; this type of policy can be taken out for terms of ten, twenty or thirty years. But because of the time limitations of a term policy, it must usually be converted to a different type of policy before it can be evaluated for a potential life settlement. Many permanent types of insurance policies give consumers the option of withdrawing a portion of the cash value and maybe be suitable for sale, in a settlement, so a term life policy owner might ask their agent about converting to one of those types.
Cash In Life Insurance While You’re Still Alive
Ife life settlements are a new concept for you, you might be surprised to learn that they are more simple and accessible than you might think. For anyone looking to get cash value out of a life insurance policy, a life settlement could be an option.
One out of every four Baby Boomers plans to work until the age of 70, and life expectancies are higher than ever before. These dynamics are driving senior adults to seek new revenue streams to fund anything from travel to new investments to long-term care expenses. According to research from the Insurance Studies Institute, more than 500,000 seniors lapse their life insurance policy annually, and only 1,250 take advantage of a life settlement. Ninety percent of seniors report that they would have considered a life settlement if they had been made aware of the option.
Magna Life Settlements specialists are available for both policy owners and their advisors to answer questions and illuminate the life settlement process. With just one simple step, seniors and their family members can learn whether their policy might be a candidate for a life settlement using Manga’s calculator tool.