When unexpected expenses happen in life – health problems, investment losses, inadequate retirement funds – some people turn to their life insurance policy for a financial fix. While that may be a way of getting cash when you need it, this option, referred to as a life settlement, is a band aid that may cost you more in the long run.
What is a Life Settlement?
A life settlement is the act of selling a life insurance policy for more than its cash surrender value but less than the death benefit amount. The sale happens between the policy owner and a third party life settlement provider. After the sale the provider will pay future premiums and will be the beneficiary of the death benefits.
The cash surrender value is the amount given to policyholders if they surrender their account.
The death benefit amount is the amount that is paid to the beneficiary after the policyholder has passed away.
Why a Life Settlement May Not Be the Best Option
It’s Only a Portion of Face Value
A life settlement won’t pay the full face value of the policy. Typically it is only a portion anywhere from 25-75%. On Texas life insurance policies there is no minimum so there’s no guarantee that you’ll get a specific amount.
You May Be Too Young
Life settlement providers are looking for a quick payout to recoup the cost of buying your life insurance policy. If you are under 65 you won’t be eligible with most providers. If they do entertain policies for those under 65 the portion that they will pay will be relatively low.
Taxes
If you opt for a life settlement then you will have to pay taxes on the money you receive from the sale. This further reduces the return you receive for liquefying the life insurance.
Loved Ones Won’t Receive the Death Benefit
A life settlement will change who ultimately benefits from the policy upon the policyholders death. The person you have named as beneficiary will no longer receive the benefits – those will now go to the life settlement company.
A Life Settlement Can Affect Medicaid Eligibility
If you opt for a life settlement you may be putting your Medicaid eligibility at risk because of the money you receive. If you rely on Medicaid the one-time payout may not be worth losing this and other government benefits.
It’s Not Exempt From Bankruptcy
Unlike your life insurance policy, a life settlement payout is not exempt from bankruptcy proceedings and creditors can be awarded the money to pay off debts. If financial problems are prompting you to consider a life settlement this factor is something worth seriously considering.
Before deciding to use a life settlement, carefully weight all your options. If you have a life insurance policy with a cash value you may be able to cash in a portion or the entire amount. You may also be able to use your policy as collateral to obtain a loan instead.
Talk to a financial planner as well as your insurance agent to determine which option works best for your situation.
Original Source: http://www.mybiginsurance.com/life-insurance-blog/the-drawbacks-of-life-settlements
Image Source: settlementbenefits.com/wordpress/wp-content/themes/revolution/images/newoptions.gif