What is a life insurance settlement?
A life insurance settlement occurs when the owner of a whole life insurance policy or universal life insurance policy sells it to another party. The financial transaction is usually characterized by the fact that it is sold for less than its face value but the seller receives a settlement that is higher than the cash value of the policy.
Why use life insurance settlements?
A settlement for life insurance is a complex and multifaceted transaction and it should never be undertaken lightly. There are circumstances that it is imperative that you sell your life insurance policy, for instance in terms of hardship. In cases of hardship and then maybe no other option and a settlement has to be undertaken. It gives the insured a cash sum that would not be possible if the policy were to lapse, it goes without saying that this is not the best reason for utilizing a life insurance settlement. In this case a life insurance settlement has been forced upon you rather than a planned financial decision.
Benefits of a life insurance settlement
However there are other instances where it is beneficial to the insured to sell the policy. A settlement transaction should never be carried out without fiscal advice from a qualified person such as accountants. Just because it was beneficial for your great-aunt Sally to utilize a life insurance settlement, it does not mean that it will benefit you personally or your family to sell a life insurance policy.
General circumstances where an insurance settlement is beneficial.
Although each settlement should be looked at individually, looking at the holistic fiscal picture there are certain broad characteristics that would confer distinct and discrete financial benefits.
Assuming that the reason for relinquishing a life insurance policy is not hardship but the owner of the policy realizes the possibly the life insurance policy is not the best policy they may want to sell it rather than let it lapse. There are good reasons for this insurance settlement decision because the whole Life Insurance face amount is surplus to requirements.
A real life example of a life insurance settlement
A person may be over 80 years of age the face amount of their life insurance policy may be $1.3 Million, if they cash that policy in they may get $70,000. However the life settlement payment may be $450,000. If they have a house and other cash investments they may be better advised to sell that policy using an insurance settlement. The life insurance policy is superfluous to their needs and a settlement is preferable to allowing the policy to lapse.
As a general rule of thumb insurance settlements are worth considering for people over the age of 70 especially those that have a high net worth of assets. In America independent estimates have concluded that more than half of people over the age of 70 the life insurance policy with a current market value in excess of the cash value offered by the insurance company.
A life insurance settlement should be made once you have examined all the options because it is not a transaction that you can go back on; if you decide two years later that it was the wrong decision – tough, it’s done. However if your financial position is comfortable in your middle life, it may be worth discussing purchasing extra life insurance with your accountant or financial advisor.
There are opportunities to set up an insurance settlement for the future on one or more policies. This does depend on the financial climate on the time and it is a course of action that should not be undertaken without a sound and complete knowledge of the financial implications. There are groups of people who specialize in life insurance investments, there are always on the lookout for policies to purchase, so if a life insurance settlement is in your fiscal interests, then it is pretty easy to be a party to this type of settlement.