What you need to know about selling your life insurance policy

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You’ve probably seen the TV commercial with the elderly couple about how happy they are that they got the money selling their life insurance policy. If you’re 60 or 70, should you also be selling your life insurance policy for a quick buck?

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The answer: maybe. But it depends on what type of life insurance you have, why you bought it, and how old you are.

If you bought a policy years ago and still want your loved ones to receive a death benefit, you’ll want to keep paying the premiums. But if you bought it because you had young children and a spouse dependent on your employment income and wanted the peace of mind that they would be okay financially if you died, you may not have – no longer need to keep coverage and continue to pay for it. .

In this case, and if the policy is whole life, universal life, or term insurance that can be converted to whole life, you may want to try selling it to an investor through something called a ” life settlement ”. This is done through a life settlement broker or a life settlement provider.

Who could buy your life insurance policy

Brokers such as Ovid Life Settlements, Welcome Funds, and Life Insurance Settlements are shopping around to find the best price for consumers. Life settlement service providers like Coventry Life Settlements and GWG Life Settlements purchase the policies themselves. (A financial cousin of a lifetime settlement is known as a “viatic settlement” – this is a cash payment for people with terminal illnesses who are typically expected to live less than two years.)

The life settlement purchaser buys the policy from you, continues to make payments, and receives any death benefits. You get a sum of money somewhere between the current cash value and the death benefit, after paying a fee, which could be up to 30% of your lifetime settlement, according to the Industry Regulatory Authority. financial.

The average life settlement payment is about 20 percent of a policy’s death benefit, sometimes up to 30 percent. So a $ 1 million policy could provide a settlement agent with $ 200,000 in cash.

But life insurance brokers and service providers are not only interested in all cash value policy. “Interest typically starts on policies valued at $ 100,000 or more held by people 70 years of age or older,” said Peter Colis, CEO and co-founder of term life insurance company Ethos. Some brokers and providers buy policies from people 65 years of age and over.

The reason they want older policyholders is, unfortunately, morbid: Companies are looking for the fastest possible payment, and the older you are the sooner you die, actuarially. The older you are, the more a life settlement company will pay for your policy.

Life settlement companies generally do not want to continue paying premiums for more than seven to ten years. They also usually don’t want policies with a cash value greater than 25% of the death benefit.

Tax implications of selling your policy

However, selling your life insurance policy has tax implications.

Although a life insurance death benefit is tax-free for beneficiaries, when you receive the life insurance settlement proceeds, you owe regular income taxes on the difference between what you owe. paid in premiums and cash value. And you will owe capital gains taxes on any money you receive in excess of that lifetime settlement amount. It is also possible that the lifetime settlement will push you into a higher tax bracket.

“We recommend that you speak to a financial advisor about the tax implications,” Colis said.

It is best to get multiple offers, either through a broker or multiple vendors. You can find a directory of life settlement providers and brokers on the Life Insurance Settlement Association website.

Photograph by Richard Eisenberg
Richard Eisenberg is the senior web editor for Next Avenue’s Money & Security and Work & Purpose channels and the site’s editor. He is the author of How to Avoid a Mid-Life Financial Crisis and has served as the personal finance editor at Money, Yahoo, Good Housekeeping, and CBS MoneyWatch. Read more

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