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Life Insurance Settlement Options You Should Know

Life insurance fits a variety of financial situations, thanks to the diversity of products available. However, your needs can change. Sometimes, you no longer need coverage and want to stop paying premiums. A life insurance settlement can help you exchange your policy for a payout. Read on to learn how life insurance settlements work, some types of settlements, and the steps you can take to sell your policy.

What is a life insurance settlement?

A life insurance settlement occurs when a policyholder sells their life insurance policy to a third party other than the original insurer. This third party is called a life settlement provider. The life settlement provider becomes the policy’s beneficiary and assumes responsibility for paying premiums. If it’s a traditional life settlement, the life settlement provider receives the death benefit payout when the former policyholder passes away.

A life settlement typically offers a larger payout than the cash surrender value, or the amount you’d get from your insurer if you surrendered the policy.1 However, this process may involve more work since you must shop for offers from different life settlement providers, and can take longer overall. Policyholders can hire licensed life settlement brokers to help them find offers. This may be a good option for policyholders who no longer need coverage and want to maximize the proceeds they receive for giving up their policy.

In general, you should be at least 65 or older to sell a life insurance policy. Laws vary, but you may be able to sell younger than 65 if you have a terminal illness or other qualifying diagnosis.1

How long does a life settlement take?

Life insurance settlements can take up to a few months to finalize.2 Additionally, many states have waiting periods that must pass before you can sell your policy in a life insurance settlement.1 Policies with larger death benefits may sell faster since they are more attractive to settlement companies.

Life insurance settlement options

Life insurance settlements come in numerous forms. Here are some common types of settlements:

Traditional life settlement

A traditional life settlement involves selling the entire policy to the settlement company for a one-time payout. This is the simplest type of settlement and offers the largest payout. However, the settlement company receives the entire death benefit, leaving none for other beneficiaries.

Retained death benefit

A retained death benefit settlement lets you keep some of the death benefit portion while selling the remainder to a settlement company. The settlement company takes over premium payments.

As a result, you can turn a part of your policy into a cash benefit and eliminate all future premiums while ensuring loved ones still receive some of the death benefit. However, you’ll have to pay a portion of the premiums.

Hybrid settlement

Hybrid settlements are a broad type of settlement that lets you customize the settlement amount and payout arrangements to your needs. For example, a hybrid settlement could entail selling part of the policy and receiving the payout in fixed installments instead of a lump sum.

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How to sell your life insurance policy

Here are the steps you can take to sell your life insurance policy:1

  • Determine if you need a settlement: First, decide if selling your policy is the right option. For example, you may consider a life insurance settlement if you no longer need coverage.

  • Shop among settlement companies: Shop among settlement providers and compare offers. Look over customer reviews if possible. This will help you find a reputable company and a good offer.

  • Select an offer and apply: Pick the best offer and begin an application. You provide information and documentation about yourself, your health status, the policy, and the insurer.

  • Wait for the company to evaluate the policy: The company evaluates your information and documents to determine a fair value to offer. They look over the policy type, premiums, the death benefit, cash value if present, and your life expectancy.

  • Receive offer: The provider extends an offer for the policy. It will most likely be between the death benefit and cash surrender value amounts.

  • Accept the offer and sign documents: If you agree to the offer, you can accept it. This involves reviewing and signing legal documents to ensure both parties are clear on the terms of the exchange and that ownership transfers properly.

  • Receive settlement funds: Once the settlement provider receives the policy, they’ll disburse payment in the agreed-upon manner. Common payment methods include checks and ACH direct deposit.

Keep in mind that life settlement proceeds in excess of total premiums paid may be taxable.3

Life insurance settlement vs. viatical settlement

Although life insurance settlements are similar to viatical settlements, there are some key differences between the two. Viatical settlements are a special settlement type for policyholders with qualifying terminal or chronic illnesses. These settlements typically provide larger payouts than other settlement types, allowing the policyholder to help cover costs associated with the illness, such as procedures and medications.

Additionally, viatical settlements are typically not taxable.2 This can give the seller more funds to help cover treatment costs and replace some of your income. However, policyholders should check with a tax professional just in case.

Is a life settlement right for me?

Determining whether a life insurance settlement is the right choice depends on several factors unique to each individual's circumstances. Firstly, you should evaluate your current financial situation and future needs. If you no longer require coverage or anticipate difficulty paying premiums, a life settlement might offer a solution. However, weigh the potential benefits against the long-term implications for your beneficiaries since they will lose the death benefit. Consult with financial advisors and explore alternative options. Determine whether a life settlement aligns with your priorities and goals to make an informed decision.

Learn more about life insurance

Life insurance settlements let you get out of your policy if you no longer need it by turning it into a cash benefit. Now that you understand a helpful option for cashing out life insurance, you can shop for policies more confidently, and Aflac is here to help. Contact an agent today to explore our policy options, including term life and whole life insurance, and get a quote.

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