How a Life Insurance Settlement Can Help Seniors

If you've never heard of a life insurance settlement, you are not alone. What you should know is that if you are 65 or older, you can sell a life insurance policy. There are companies that will pay more than the cash value of your policy " sometimes even a term life insurance policy (which has no actual cash value).

This sale of a life insurance policy is called a life insurance settlement. This option has been available since 1995. The buyers are usually pension and institutional funds that make the purchase through an insurance settlement company.

There are several reasons to consider a life insurance settlement.

1. The policy is no longer needed.

The majority of all life insurance (78%) is purchased to insure the life of the main income earner to provide income to support the family, educate the children and pay off the mortgage.

However, later in life these needs may have disappeared. A life insurance settlement can turn a policy that is no longer needed into more cash than simply cashing it in.

2. You have found it necessary to borrow heavily against the policy.

At some point, you may have taken a maximum loan against the policy and never repaid it.

Every year you receive a bill for the interest due. If you are like many people, this goes in the round file and you never pay the interest. What happens is each year the interest is added to the loan.

Over time, the loan and the unpaid interest can consume the entire cash value. That's when you get the letter from the insurance company telling you that to keep the policy in force, you need to come up with some astronomical amount of money. But that's not the worst of it. If the policy lapses there will likely be a gain that the insurance company is required to report to the IRS. Worse yet is the fact that there is no money in the policy to pay the tax.

A life insurance settlement can solve all these problems. When you sell your policy, the loan becomes the institutional purchaser's problem. In the real world, they will pay off the loan and get rid of the potential lapse problem.

The only downside is that not all policies with loans are candidates for a life insurance settlement. Settlement companies may not be willing to make an offer on a policy with too large a loan or may make an unacceptable offer.

3. Interest rates have declined on your Universal Life policy

One of the factors that is used to determine the premium you pay on a universal life policy's face value is the assumed interest rate at the time you purchased the policy. If, as has happened recently, interest rates decrease, your original premium amount might not be adequate to keep the policy in effect.

All of a sudden you are notified that if you want to keep the policy in effect you have to come up with the difference " usually a huge amount of money.

A life insurance settlement averts this problem as well.

Here are a few real examples.

An 82-year-old woman who bought a $1 million universal life policy years ago has been paying the same premium for decades. She has been notified that the premium has not been adequate to maintain the policy. The difference has been deducted from the cash value of the policy. It is now valued at just $17,800. Unless she can pay huge premiums, the policy will lapse in two years.

Her estate plan includes keeping some kind of insurance policy in effect, but at a much lower amount. She decides to solve this problem by accepting a life insurance settlement of $192,000. She then turns around and uses it to buy a paid-up life insurance policy and covers it with a single-premium payment.

A man's wife died several years ago. He no longer needed the $300,000 policy he has been carrying to protect against his premature death. He could have cashed it in, but it only had a cash value of $518. So he asked his agent to research a life insurance settlement and sold it for $53,000, paid off all his credit cards, went down to the dealership, plunked down cash for a new car and took a vacation.

Finally, consider a 65-year-old man with a ten-year term life insurance policy purchased when he was 55. The policy will expire in a few months. Despite the fact that a term policy has no cash value, he is able to negotiate a life insurance settlement for $8,400.

Don't rule out term insurance policies as candidates for a life insurance settlement. You may be surprised at the offer that is made on a policy that has no surrender value.

The bottom line is this: if you are age 65 or older and you have any kind of life insurance policy that is no longer needed or fits one of the examples I have described, you might do very well to take a good long look at a life insurance settlement.

Robert D. Cavanaugh, CLU is a 39-year veteran of the life insurance, financial and estate planning industry. He publishes The Smart Giver, a planned giving educational series which teaches techniques to increase income and reduce taxes while simultaneously helping churches and non-profits. Additional information about how a life insurance settlement can be used for fundraising can be found on his blog.