After paying life insurance premiums for decades, some policyholders decide that they no longer want or need to continue doing so. Here are a few examples that illustrate why a life insurance policy may not be wanted or needed. The policyowner’s spouse has passed away and the couple had no children; the policyholder’s children are grown and now self-sufficient; or the policyowner and the beneficiary have since divorced. Additional reasons include the financial inability to continue paying the premiums and the desire to spend the money on something else, whether practical or for pure enjoyment.
The attached infographic, Life Settlement Investments: Risks and Rewards, is a brief overview of this important topic. There are several options for dealing with life insurance policies when the seller decides not to continue paying the premiums. One alternative is for the policyholder to simply stop making the payments and let the policy lapse. We don’t recommend this option; after just a little bit of research and discussion with a qualified advisor, the policyholder will learn of options that can provide financial benefits.
The policyowner can surrender the policy to the company that issued it and receive whatever the cash value is at the time of surrender. A life settlement transaction, however, may net the owner more money while simultaneously providing a money-making vehicle for a third-party investor.
As explained in the infographic, during a life settlement transaction, the seller receives more cash than he or she would get from surrendering the policy, albeit less than the full value of the death benefit. The buyer (investor) continues paying the premiums until the policy matures and collects the death benefit when the original policyholder dies.
What to do with a life insurance policy is a question commonly asked by senior citizens. While it seems to be generally known that life insurance policies can be allowed to lapse or can be surrendered for cash, many consumers are not familiar with the concept of life insurance settlements. In fact, this may be the best option for many retirees needing extra cash to finance their retirement or to pay medical and long-term health care bills.
A life settlement can also be a good investment for the buyer. Financial returns may exceed those of traditional investments. Life settlements generally have little correlation to traditional economic cycles, and can produce consistent returns, regardless of what’s happening in the broader market.
We hope the infographic offers you enough information to at least get you thinking about whether this kind of transaction is right for you and your unique circumstances. Please know that government regulations are in place in most states to protect both consumers and investors.
Still not sure? Both buyers and sellers should speak with an experienced financial adviser who will counsel them on the advantages and disadvantages based on their particular situation. Be wise and talk to an expert!