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Financing Your Retirement with a Life Settlement from Life Insurance

On the face of it, retirement planning may seem simple and hasn’t changed much over the years. You put in the work, you save, and you retire. Although the mechanics of retirement planning have remained the same, today’s aspiring retirees are grappling with challenges that previous generations didn’t have to worry about, including longer life expectancy and defined contribution plans that are subject to market ups and downs.

If you’re worried about not saving enough for your retirement years, you’re not alone. A lot of folks get anxious about saving for an unknown future and coming up short in the end. Thankfully, there are numerous ways that can help boost your retirement savings. One such way to finance your retirement is with a life settlement from your life insurance.

While a life settlement is not for everyone, it’s critical for current and soon-to-be retirees to be aware of this option. In this article, you’ll learn about life settlements, how they work, their qualifications, and who should consider this option.

What Is A Life Settlement?

A life insurance settlement or life settlement is a financial transaction where you, the life policy owner, sell your life insurance for a lump sum of cash. The buyer becomes the new owner and/or beneficiary of the policy and is now responsible for paying the premiums.

In general, life settlements are used by policyholders who can no longer afford the monthly premiums or need the policy to pay for a considerable upcoming expense. The cash from the settlement is typically used for financial relief, such as covering long-term care expenses, emergencies, and added funding for retirement.

How Do Life Settlements Work?

A life settlement transaction works like this:

  • The owner of the life insurance sells their policy to a third-party buyer for an upfront cash payout.
  • The buyer becomes the new owner and/or beneficiary of the life policy and is responsible for paying future premiums.
  • The buyer collects all death benefits when the insured (i.e., the original policy owner) dies.

By selling your life insurance, you’re transferring every aspect of the policy to the buyer in exchange for cash. The cash payout is usually more than the policy’s surrender value, but less than the described death benefit.

How Much Money Can I Get From a Life Settlement?

The typical life settlement payout will be approximately 20%-25% of the policy benefit amount. Therefore, if you sell a $1,000,000 policy, you may get $200,000 to $250,000 in cash on average. Of course, the amount you’ll get for selling will differ on a case-to-case basis. However, there are general factors that will determine how much money you can get from a life settlement: 

  • Age and Health of the Insured: The policyholder’s life expectancy is the primary factor that affects a settlement offer, which is calculated based on the age and health of the insured. Generally, the lower the life expectancy, the higher the settlement value.
  • Policy Size: Larger policies tend to be worth more.
  • Premium Amount: Policies with lower monthly premiums relative to their size will have a higher selling value.

Also, remember that the proceeds you receive from a life settlement payout may be taxable. In general, the proceeds from a life settlement transaction are taxable if they’re worth more than the cost of the life insurance policy, meaning the total amount you paid for premiums.

From the example earlier, let’s say you received $250,000 in cash after selling the policy, but you paid $200,000 in premiums. The $200,000 you paid in premiums is not subject to taxation, but the remaining $50,000 will be taxed. Conversely, there are no taxes if the total amount you paid in premiums is more than the policy’s cash value.

Who Should Consider a Life Settlement?

As mentioned, a life settlement is not appropriate for everyone. However, there are several circumstances where it makes sense for someone to sell their life insurance policy for a cash payout. Some of the top reasons to consider a life settlement are: 

  • You can’t afford the monthly premiums anymore – As retirement becomes more expensive, life insurance premiums are also skyrocketing. If you feel you can’t afford the premiums anymore, life settlement gives you cash and removes a monthly expense at the same time.
  • You want more income for retirement – You can add cash from the settlement to your retirement funds and enjoy your golden years after a lifetime of employment.
  • You have a sizable upcoming payment – From retirement home expenses to emergencies, life settlement payouts can come in handy to cover future expenditures.
  • You want to settle your debts – Seniors who are still carrying debts from mortgages, credit cards, and other loans may want to sell their life insurance policies to pay any outstanding debts.
  • You want cash to cover medical bills and long-term care – Life settlements are a popular resource to help mitigate healthcare expenses.

Who Qualifies for a Life Settlement?

Before you sell your life insurance policy through a life settlement, you must make sure that you’re qualified. In most cases, eligibility applies to people who:

  • Are 65 or older. Younger applicants may qualify if they’re in declining health.
  • Have a policy with a benefit amount of $100,000 or more.
  • Own a policy that has accumulated cash value (e.g., whole life, universal life, or convertible term life policy).
  • Have a policy that has been active for 25 months or more. However, some states have enforced a 5-year requirement for life settlements.

It might be a good idea to contact a life settlement broker to evaluate your case and determine eligibility.

What Are Alternative Options to a Life Settlement?

Life insurances are a crucial part of a broader financial plan, so many seniors may be unwilling to sell their policies. If you don’t think a life settlement is right for you, consider some alternative options below.

Alternative OptionHow It Can Help
Accelerated Death Benefit (ADB)An accelerated death benefit (ADB) is a provision that comes from an insurance policy where the policyholder can receive a lump sum of cash against the death benefit if diagnosed with a chronic or terminal illness.
Loan From Policy’s Cash ValueInsurance companies will let you borrow against your policy’s built-up cash value. You can undo the transaction by paying back the loan, or the lender will deduct the amount from your death benefit.
Reverse MortgageA reverse mortgage is a loan that older homeowners can borrow based on how much equity they have in their homes. You must be 62 or older to qualify.
Cash Out Based on Surrender ValueYou can give up your life insurance and receive cash based on your policy’s surrender value. Although the surrender value will always be less than a life settlement, it enables you to get out of the life settlement market and use the cash for retirement.
Premiums Assumed by BeneficiariesIf premiums become too expensive or the policy is no longer needed, you can get financial relief by eliminating the ongoing expense of monthly premiums. To keep the policy in force, you can ask your heirs or beneficiaries to pay for future premiums so they remain entitled to the death benefit.

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