Life Insurance Settlement—an Alternative to letting your Insurance policy lapse

When people are young and have large mortgages and a family of small fries to bring to adulthood, they often take life insurance policies that are intended to provide the family with several years of income or financial stability in the event of the death of the primary wage earner. When the kids are grown, and the house is paid off, you may not need as much life insurance. Also, as you face retirement, you may find that paying the premium becomes a hardship. Instead of letting your insurance lapse, or cashing it in, however, you may be able to take a Life Insurance Settlement (AKA: Senior Settlement).

How it works:
A Life Insurance Settlement—once available only as a Viatical Settlement—is simply the sale of your policy to an investment company. Terms, Universals, and whole life policies are all possibilities for a settlement, although, if it is a TERM, they will usually look to see if it can be converted to a Universal Life. Then the investment company will pay you a percentage of your policy's face value, and will take over the payment of premiums. When you die, the company will get the payout.

The purchase price for your policy can be substantial. It could give you enough to purchase a smaller single premium whole life along with Long Term Care Insurance. Be aware, however, that if you still need life insurance, you will need to invest some of the money in another policy, perhaps one with a lower premium.

Using the familiar
When people can no longer afford to keep their insurance in force, they usually either cash it in, simply let it lapse, or convert all or part of it to some other form of Life Insurance. A more productive alternative is to take the cash out of the policy and convert it via a 1035 exchange into an annuity. Then the money continues to grow, but the premium no longer has to be paid.

A Life Settlement can enhance a 1035 conversion. Instead of converting just the cash value that has accumulated, you may be able to get enough to purchase a small burial or whole life policy that will handle final expenses and put the rest into an annuity to build your legacy. With an annuity, you can get a certain percentage each year and can eventually withdraw as much as you want. It grows tax deferred, and if you do need some of it, you are taking your own money rather than borrowing against your life insurance.

No longer just for the terminally ill
You may have heard the term "Viatical Settlement." This is simply a Life Insurance Settlement in which a terminally ill individual could sell his or her life insurance and use the proceeds before death, when the money was most needed. The company would pay a large percentage of the face value because they expected to pay the premiums for only a year or two before collecting. The Federal Government has ruled that an individual can sell a policy even if he/she is not terminally ill. If you purchased a policy when you were very young, chances are you had a large face value with a small premium. Even though the premium may increase, a company will expect to pay a minimal premium in return for the benefit upon your death.

Consider this
A life settlement may be an attractive option. Before taking that route, however, make sure that you truly do not need the life insurance and that your final expense are accounted for. If you are 70 or older and are in poor health, you may not be able to replace the old policy even with something smaller. But, if you have prepaid a funeral, have paid off your mortgage, and have already planned for whatever legacy you want to leave, a Life Settlement is a possibility that is definitely worth considering.