Life insurance policyholders are increasingly selling policies for cash to third parties. In 2020, the total face amount of life settlements in expected to pass $3 billion.
Annual increases in investment capital entering the marketplace, along with increases in television and digital ads, have resulted in increased consumer awareness. Policyholders are finding reasons to sell a life insurance policy, like any other asset, rather than allowing it to lapse or surrendering back to the carrier.
Considering the number of life settlement transactions taking place in a given year, it’s impossible to know each reason that policyholders have wanting access to a lump sum of cash. However, with surveys and interviews with life settlement brokers, a few of the more common reasons are explored.
These can help an individual to decide if this is a viable strategy for them to pursue.
Policyholders Can Receive A Lump Sum Payment Or Fixed Monthly Payments
The most common reason consumers seek life settlements is to access a single lump sum cash payment.
Policyholders receive a single cash payment, an amount that is greater than it’s cash surrender value but less than the face amount. So, rather than taking payments over a period of time, life settlements offer policyholders access to capital while still alive.
Policyholders can also structure a life settlement to pay a fixed monthly amount of money instead of receiving a lump sum payment. This monthly income stream is used by many people to supplement other income from retirement accounts and social security. It can be used to pay regular monthly living expenses and add a cushion to monthly income. This can relieve financial pressure and reduce budget-related stress.
Extend Retirement Fund
With the average life expectancy in the U.S. increasing, many life insurance policyholders are finding themselves potentially vulnerable to running out of retirement funds. Faced with selling assets like homes and cars, retirees are increasingly turning to life settlements to fund basic retirement plans to maintain standard of living.
Fund Medical Expenses, Hospice, Or Long-Term Care
Medical expenses can increase suddenly and dramatically. Unfortunately, health care costs continue to rise requiring hire percentage of monthly budgets and long-term savings. Life settlements provide money to help people pay for expensive medical care, alleviating the pressure faced from mounting medical bills. Life settlements can also provide funds needed for hospice care, as well as money to pay for long-term care.
Gift Funds To Family & Charitable Donations
Many policyholders report the desire to witness children and grandchildren enjoy inheritance. Instead of waiting for the insured to pass away to access inheritance funds, the policyholder can sell the policy for cash and distribute while still living.
Additionally, many policyholders name charities and foundations as beneficiaries. Instead of waiting to pass away to allow them access to funds, a policyholder can sell a policy for cash and then witness the donation and the fruits of the donation while still living. This not only is of great benefit to the recipients, but the donors report personal satisfaction that comes with giving back.
Relief From Monthly Premiums
Another commonly reported reason for selling a life insurance policy for cash, at least initially, is eliminating the monthly premium payments from the policyholder’s budget. Many policyholders report becoming aware of the life settlement option only after searching for information about lapsing polices due to non-payment. When a life insurance policy is no longer needed, it becomes more difficult to justify making the monthly payments. Further when budgets are tight, especially during retirement years, the life insurance payment is usually one of the first expenses considered for elimination
A life settlement, along with access to capital, transfers the monthly premiums to the purchaser of the life insurance policy. This relieves consumers of future payments.
Avoid Allowing Policy To Lapse At All Costs
In nearly all cases, a policyholder over the age of 65 allowing a life insurance policy to lapse represents a massive failure. After paying premiums for decades, all value from the policy that has accrued over the years is forfeited back to the insurance company.
It’s estimated that over $100 Billion in face amount of life insurance policies owned by seniors age 65+ lapse annually. Policies that may already qualify or may someday qualify for a cash settlement are lost every year. The only party that benefits from this scenario is the insurance company who spent decades collecting premiums that will never have to pay out a benefit.
Luckily, many policyholders will get a hunch and search for alternatives online. Others report seeing ads on television or online. The need for consumer awareness remains high. Additionally, new laws and regulations are starting to require carriers to alert life insurance policy holders to the life settlement option.