Many seniors will consider a life insurance settlement deal as they get older. For some, this is an easy way to raise a cash lump sum to use in retirement and to get rid of an unwanted policy. Others may prefer/need to keep their coverage in place as part of their estate planning. What are the benefits and downsides of selling life insurance as a senior settlement?
The Advantages of Senior Life Settlements
Senior life settlements allow individuals to sell life insurance to a third party for a cash payment. Whether this is a good idea or not comes down to the preferences and circumstances of the individual. This may, for example, work well for those that:
- Are paying for life insurance coverage that they no longer actually need (i.e. they have no remaining debts to cover, they have no heirs or their families will not need financial help when they die).
- Find the costs of keeping their insurance in place a burden in retirement.
- Would prefer to have a cash payout to enjoy spending before they die.
- Need to boost their retirement income as they cannot cope financially or have unexpected commitments such as medical expenses or long term care costs to meet as they get older.
- Find that they are overinsured and would prefer to set up a new reduced coverage policy to save money.
- Cannot keep their policy going but would prefer to see a return on investment rather than letting it lapse (with no return) or getting a cash surrender payout from the insurance company.
- Have been diagnosed with a terminal illness and want/need cash before they die.
In some cases seniors may sell all of their coverage. It is, however, possible to sell part of a policy and to keep some of the insurance in place at the same time.
The Disadvantages of a Senior Life Insurance Settlement
It is important to take an informed view before opting to sell a policy in a life settlement deal. This may not be a good idea for some seniors. Some of the disadvantages include:
- The senior will lose the policy once it is sold and the ultimate payment will be made to the third party that buys it and not to their heirs.
- The settlement sum may be worth having but it will not equal the face value of the coverage.
- It may be harder to get a cheap life policy at an older age and the existing policy may eat into the allowed "capacity" for some preventing them for getting enough replacement coverage.
- Some may find that the cash sum that they are paid reduces/stops their entitlement to existing benefits.
- A cash settlement may be taxable which could eat into the amount of cash that is actually received.
Those considering replacing an existing life insurance policy with a new one as part of a settlement deal may find it better to do this before they sell their old policy. Before choosing to take up a senior life settlement offer, it may also be worth getting independent financial advice to check that this is the right move to make.
Those interested in taking this further may also find it useful to:
- Learn more about senior life settlements and how they work.
- Consider whether they actually need life insurance in retirement.
- Look at alternative senior insurance options such as funeral and burial coverage.
- Consider a viatical settlement if they have a terminal/critical illness.
Carol Finch - Carol Finch is the Topic Editor for Retirement Planning, Budgeting, E-Commerce & Technical/Business Writing on Suite101.
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