What Are Some Life Insurance Settlement Options?
Given the shape of the economy, people are looking for every possible way to bring in extra income, whether temporarily or on a permanent basis. One new source of income is your life insurance policy. The question is, "What should you do?" Sell the policy? Stop making premium payments and let the policy Cash Value pay the premiums as they come due? Take cash withdrawals from the policy? Borrow against the policy?
It definitely makes sense to look at your life insurance policy as a source for immediate funds, if you have clear goals in mind. This is especially true, if you own a life insurance with some built-up cash value.
You can access cash in your life insurance policy by several methods. You will want to review all of the options before making a decision. Just keep in mind that taking cash from your life insurance policy is a decision that, once made, affects the usefulness of your life insurance policy for future needs.
Here are the most used methods for accessing cash from your life insurance policy:
You may wonder, "What is a life settlement?" This option is quite easy to understand.
A life settlement involves the decision to sell your life insurance policy to an investor or a company through the use of a broker so you receive cold-hard cash.
The new owner of the life insurance policy keeps the policy in force by paying off your premiums. This investor, eventually, receives a return on their investment in the form of the policy's death benefit.
In most cases, to qualify for a life settlement, the insured person must be at least 65 years old, with a life expectancy not to exceed 15 years. Also, the insurance policy payout must be at least $100,000.
Several options to selling your insurance policy are available. You need to weigh each of them carefully.
Stop Making Payments
One option is to stop making payments to your insurance policy and let the accrued cash in your policy make the premium payments for you. Of course, when you use this option, your death benefit goes down, your cash value goes down, and when the cash value is depleted, your policy becomes worthless.
Another possibility is to withdraw a limited amount of cash from your life insurance policy. This depends on the issuing insurance company and the type of policy you own. One advantage of life insurance cash-value withdrawals is that these withdrawals are not taxable until the policy withdrawal amount exceeds your policy basis. This applies, only if your policy is not a Modified Endowment Contract.
Typically, these cash withdrawals reduce the death benefit and are considered to be a partial surrender of your policy.
Another possibility is to borrow money from the issuer of your policy, using your cash value account for collateral.
The terms of your policy dictate the terms of your policy loan interest rate.
Keep in mind that you do not have to qualify financially for the loan on your life insurance policy. The loan amount is based on the value of your cash-accumulation account and the terms of your life insurance policy contract.