5 Reasons People Sell Their Life Insurance For Cash

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5 Reasons People Sell Their Life Insurance For Cash, Including Whole & Term Policies

Chicago, IL Over the years, the life settlement brokers at Windsor Life Settlements have heard many reasons why their clients sell a life insurance policy for cash. The most common reason is to help cover the costs of medical care and long term care.  Many people are unsure about what life settlements are, others are unaware of the financial option entirely.  How to sell a life insurance policy for cash can be a significant decision.  Most policyholders are off to a great start using a life settlement calculator to determine eligibility.  Life settlements offer a variety of benefits, depending on your current stage of life. These benefits include the following:

  • Retirement funding
  • Relief from high premiums
  • Medical care funds
  • Tax benefits
  • Gifts and estate planning
 

Learning more about the benefits of a life settlement will help you determine if this is the best choice for your particular situation.

Overview

A life settlement occurs when you sell your life insurance policy to third party for cash. The value of this sale will be more than the policy’s cash surrender value but less than its death benefit, which is also known as its face value. The buyer will continue paying the policy’s premium to the insurance company and receive the death benefit when you die.

Life settlements are often worth considering when the only other alternatives are to surrender the policy or simply allow it to lapse. The ideal candidate for a life settlement is someone who is at least 70 years of age and has a policy with a face value of at least $100,000, although some experts recommend a minimum value of $200,000. Policyholders with significant health impairments are qualified at any age. Anyone considering a life settlement should consult with a financial advisor before making this decision.

Retirement Funding

The retirement savings of many people were significantly reduced during the most recent economic downturn. You may need a little extra money to live on while the market recovers, or you may not have had enough savings to begin with. You may also need to pay off some accumulated bills.  If you’re like our client Ted Muller, you might seek out a life settlement to pay for bucket list items like travel and a new car.

Creating additional retirement income is one of the most common reasons for selling your life insurance. You can structure a life settlement so that you receive a payment each month instead of a single lump sum. This strategy is helpful for making ends meet when you’re living on a fixed income.

Relief From High Premiums

Some people may want to sell their life insurance because they feel there’s no reason to continue paying life insurance premiums each month.  The policyholder’s children are fully grown and the need for the policy has been greatly reduced but the cash equity in the policy can still be accessed.  In these cases, it might make sense to convert the policy to a single cash sum.

Life settlements can help relieve you of the burden of paying a monthly premium, especially if you’re on a fixed income. This is a common reason so many people simply allow their life insurance policies to lapse. However, a life settlement provides you with the opportunity to recover some of the money you’ve paid into your life insurance over the years.

Paying Off Medical Bills

This is the most common reason that we have heard over the years as to why people are interested in selling their policies. In a recent case, our client set up a fund to cover medical bills, home renovations, and an income stream for his wife for the rest of her life.

People who are terminally ill often consider life settlements to be a means of supporting themselves once they’re unable to work. Life settlements help pay for regular expenses such as medical treatment and hospice care. Some people also use them to pay for long-term facilities.

Taxes

A life settlement can provide tax benefits. The proceeds from such a sale are taxed as regular income, although the IRS defines the proceeds as the difference between the premiums you paid and the settlement amount. That means you only pay taxes on the profit you made from the sale of your life insurance.

Gifts

Another very popular and powerful answer that our life settlement brokers will hear  is that people want to be alive and present to see their children and grand children enjoy their inheritance.  Being able to see grandkids open gifts, take family on vacations, fund college tuitions etc, is a blessing that policyholders will seek out for various personal reasons.

Why Should I Cash In My Whole Life Insurance Policy?

There are very few reasons you should continue making payments towards whole life insurance. The principle reason for owning whole life insurance is to ease the burden on someone who would suffer financially by your death. Fewer consumers are focusing on that reason alone. You may have used your whole life insurance to diversify your investment portfolio, in which case you are essentially treating it like an asset. As an asset whole life has some benefits, but many more flaws. This means that the money you would earn as a lump-sum payment could go into a wide array of other investment vehicles that would have better annualized returns.

First, you are probably paying monthly premiums. These premiums drastically increase the length of your break-even period. In addition, the front-loaded nature of the investment into the policy makes other investments much more attractive. Very few insurance policies actually pay dividends. Those policies that do pay dividends typically have an annualized return of fewer than 2%. Many certificates of deposit pay out between 2-3% of the principle, if you don’t consider taxes. These are some of the most safe investment vehicles with the exception of treasury bills. Also, larger principle investments yield much higher rates over time.

Even if a dividend were included, it would not cover the cost of the monthly premium, and would still come out to a lower return than the CD. Other investments yield dividends, as well. For example mutual funds are a great way to grow money without much risk. Cashing in your whole life insurance could give you a nice amount to seed an initial mutual fund investment.

Mutual fund owners are required to pay capital gains taxes, but these are at a much lower rate than income taxes. Even though insurance policy holders can avoid tax payments, they still require monthly premium payments. These variables cancel each other out, so the only point of comparison remains in the rates of return. Most mutual funds (specializing in low volatility markets) have rates of return in excess of 5%. Insurance policies rarely beat 2%. So, for incurring a little bit more risk you would stand to make 3% more on the money you invest.

There are a lot of different options. If you are seeking tax free contributions, you can cash in your whole life insurance policy to start a Roth IRA account. These should be an integral portion of your investment portfolio. You can contribute up to 5,000 dollars annually. Though the insurance policy is tax-deferred as well, the cumulative nature of growth is a great retirement fund seed. As a pure investment strategy, the whole life insurance policy yields far fewer benefits that a Roth IRA.

These are just a few of the many reasons you should consider cashing in your policy. The return rate of a whole insurance policy barely keeps pace with insurance at current rates. Also, if you are looking to reduce outstanding debt, then the cash would reduce further damage to your credit rating.

Why Sell Your Convertible Term Life Insurance?

To fully understand the nuances of Convertible Term Life Insurance, it is important to understand the breakdown of the two components of the policy. First, the “term” portion of the policy refers to the period of coverage. Someone with term coverage pays for a specific amount of time, ranging anywhere from one year to thirty years. Universal coverage is the alternative to term coverage, and it refers to an individual being insured for a lifetime.

The Convertible portion of the policy allows the insured individual to convert to a whole life insurance policy at a later date. The convertible policy also allows the insured individual to pay lower rates in the preliminary stages of their lives. The payments eventually balloon as time progresses to account for the higher cost of advanced age. However, the convertible policy holder can change their policy to whole life insurance. At this point they would pay substantially lower their payments.

The convertible term life insurance policy is a poor choice of investment. Most large, front load investments such as CD’s outpace the annualized 1 to 2% returns that this type of policy typically generates.
Is it really worth your time to own these policies? You must take several factors into account when you consider whether or not it is worth your while or not. First, you have to decide if your health is really in such poor shape that you have the potential to lose your life abruptly. There are internal and external factors to consider. First do you exercise, and make it a point to consume proper nutrition? If so, then you are at a much lower risk of suffering from an abrupt ailment.

Next you’ll have to consider you habits. Are you the type of person who enjoys regular skydiving? How about base-jumping, or diving? If you don’t regularly do these things, or things like this you are at a very low risk of abrupt death. If you do exercise and refrain from high risk activity, there is no immediate need for the term insurance, especially when you could realize between 3-6% annually realistically.

Summary

There are many great reasons for selling your life insurance policy for cash. You can learn more about life settlements and decide if this is the best option for you. Once you decide to pursue a life settlement, preparing for the life settlement process will be what comes next.

 


Questions?

1-888-994-6376
nick@windsorls.com

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