You have worked hard all your life and you have finally retired. Your children are all grown up and have families of their own. Your mortgage is paid and all your debts have been cleared. There is no one dependant on you financially. If you are in such a situation, you should seriously consider life settlement. A life settlement is a financial transaction in which you sell your life insurance policy to a third party for a price higher than the cash surrender value offered by the insurance company. The purchaser becomes the new beneficiary of the policy and is responsible for all subsequent premium payments.
The two main advantages of a life settlement are that you are freed from the obligation to pay the premium and you receive a lump sum payment. When you sell your life insurance policy, you no longer have to pay the premium. After you retire, life insurance policy premium can be a strain on your limited finances. Life settlement can get you cash on your life insurance policy even before death. You usually receive a much higher surrender value than what the issuing insurance company attaches to the policy. There are no restrictions on the use of this money. You can use it for any purpose – to go on a vacation, to buy expensive gift for a loved one, etc.
Generally, life settlement companies require the total sum of the policy’s worth typically needs to be over $250,000. Life settlements are different from vertical settlements. Vertical settlements involve the sale of life insurance policies by terminally ill patients.
There are a few things you need to consider when you decide to enter into a life settlement. First of all talk to your financial advisor or insurance agent. You must read the documents before you sign them. Pay attention to the fine print. Remember, once you sell the policy, it is out of your hands and you cannot get it back. The company buying your policy will pay the premium and get the death benefits. Shop around for the best deals. Use the services of a broker if needed. Make sure the life settlement company you deal with is licensed. The proceeds from a life settlement transaction are generally subject to tax. Different parts of the proceeds will be subject to different tax treatment. The settlement amount will be taxed as ordinary income. Any proceeds up to the cost basis (the amount paid in premiums) will be tax exempt. Any proceeds exceeding the cash surrender value will generally be treated as a capital gain.
