Considerations When Deciding to Sell
A life settlement might make sense for you if you no longer want or need your current policy—or if you can no longer afford the expense of paying insurance premiums and are willing to give up or replace the coverage. Even then, however, proceed with caution. Here are some key factors to consider:
- Ongoing Life Insurance Needs. If you’re considering buying a new policy with the proceeds of the life settlement, will you be able to get a new policy with equivalent coverage—and at what cost? Your old policy will still be in force through the purchaser and may affect your ability to get additional coverage. Even if you can get a new policy, you might have to pay higher premiums because of your age or changes in your health status. If your goal is to retain coverage but lower the premiums you pay or otherwise obtain different features, you might want to consider options such as reducing your existing amount of policy coverage or making a "1035 Exchange."
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Less Costly Alternatives. If one of the factors driving your decision is a need for cash, surrendering your life insurance policy for its cash value or pursuing a life settlement are not your only options—especially if you’d ideally like to retain your coverage. You might be able to borrow against your policy. You might also be eligible for accelerated death benefits, which allow an individual with a long-term, catastrophic or terminal illness to receive benefits on their policy prior to dying. Check with the company that issued your policy before entering into a life settlement.
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Impact on Your Finances. The lump sum payment you receive in exchange for your life insurance policy can be taxable, depending on your circumstances. It may also negatively impact your ability to receive state or federal public assistance such as Medicaid.
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Impact on Your Survivors. Consider your need for current income against the future financial needs of your survivors. Even if you’ve determined that they don’t need the proceeds from your insurance policy at this time, ask whether there’s a chance that this situation could change. If so, ask yourself whether you can obtain the liquidity you seek from other sources or by trying alternative ways to tap into the insurance proceeds as suggested above.
- Access to Your Health Information. Any interim and ultimate buyers of your policy might have access to a great deal of personal information about you, including your health status, that in turn can be shared with other entities. You might also have to agree to provide periodic updates about your health, which also might be shared.