Life settlements offer a financial lifeline for seniors who no longer need or can’t afford their life insurance policies. By selling a life insurance policy through a life settlement transaction, the policyholder receives a lump sum payment that is usually greater than the cash surrender value but less than the death benefit.
This can be an effective way to unlock value from an underperforming or unnecessary policy. However, what happens after the settlement is complete? This article explores the various aspects of life settlements after the sale is over, including responsibilities, tax implications, and the impact on beneficiaries.
WHO IS RESPONSIBLE FOR PREMIUMS AFTER A LIFE SETTLEMENT?
When a life settlement is finalized, the new policy owner assumes all future premium payments. This transfer of responsibility is a significant relief for the original policyholder, who no longer needs to budget for monthly or annual premiums. For many, the cost of maintaining the policy is the primary reason for pursuing a life settlement in the first place.
Not having to worry about premium payments can greatly improve the original policyholder’s cash flow. They can then use the freed-up funds for other expenses or investments or simply to enhance their quality of life. This is one of the key benefits of a life settlement — providing financial flexibility and eliminating a burdensome expense.
The shift in premium responsibilities is straightforward. Once the sale is complete, the new owner — usually an investor — takes over all obligations related to the policy. This means the seller has no further financial commitments.
DEATH OF THE INSURED AFTER A SETTLEMENT
After the insured person passes away, the new owner of the life settlement contract receives the death benefit. This is a crucial point for those considering a life settlement. The original beneficiaries named in the policy will not receive any payout. This change can have emotional and financial implications for family members who may have been relying on that benefit.
It is essential to weigh the benefits of a lump-sum payment against the loss of the death benefit for your beneficiaries. For some, the immediate financial relief outweighs the future benefit. For others, especially those with dependents, it might not be the best choice. Discussing this decision with family members and a financial advisor is a wise step before committing to a life settlement transaction.
Additionally, it is important to remember that the buyer of the policy may reach out to their designated contact for periodic health updates. This is to assess the ongoing value of the policy, which can be a sensitive issue for some.
RESTRICTIONS ON LIFE SETTLEMENT PROCEEDS
Life settlement proceeds are generally unrestricted, meaning policyholders can use the life settlement funds however they see fit. Whether it is paying off debt, covering medical expenses, or investing in new opportunities, the choice is yours. This flexibility is one of the main reasons why people choose to sell their life insurance policies.
However, there are a few scenarios where restrictions might apply. For example, if the policy was used as collateral for a loan, the lender may have a claim on part of the settlement proceeds. Additionally, if there are creditor claims against the policyholder, they may also have a right to some of the funds. Understanding these potential restrictions before completing the settlement is crucial to avoid any surprises.
It is always a good idea to consult with a financial advisor before finalizing a life settlement contract. They can help you navigate any potential pitfalls and ensure you have a clear understanding of your financial situation post-settlement.
ARE LIFE SETTLEMENTS TAXABLE?
Understanding the tax implications of a life settlement is essential for setting the right expectations. Tax implications may arise when you sell your life insurance policy through a life settlement. But, thanks to the Tax Cuts and Jobs Act of 2017 (TCJA), the taxation rules are now more straightforward.
Generally, the net proceeds from the sale (the difference between the sale amount and your premiums) are taxed as long-term capital gains. For example, if you sell a policy for $100,000 but paid $75,000 in premiums, only the $25,000 profit is subject to long-term capital gains tax. However, if the premiums you paid exceed the sale amount, there is no tax.
It’s also important to note the distinction between standard life settlements and viatical settlements. Viatical settlements, which involve terminally ill policyholders, are not taxable under IRS rules.
Note: We are not CPAs. Therefore, we recommend that, along with reaching out to us for more information, you consult a tax professional who understands the complexities of life settlements. A qualified tax advisor can help you navigate the tax implications and suggest strategies to minimize your tax burden.
COMPLETE YOUR LIFE SETTLEMENT TRANSACTION WITH EASE
A life settlement can be a valuable financial tool for those looking to unlock value from their life insurance policies. However, it is essential to understand what happens after the transaction is complete. From shifting premium responsibilities to the tax implications of receiving life settlement funds, there are several factors to consider.
By understanding the ins and outs of a life settlement, you can make an informed decision that aligns with your financial goals. Whether you are seeking immediate cash relief or looking to invest in new opportunities, a life settlement could be the solution you need.
If you are thinking about a life settlement, it is crucial to consult with professionals who can guide you through the process. Life Settlement Advisors has the experience and expertise to ensure you make the best decision for your financial future. Contact us today to see if you qualify and learn how to make the most of selling your life insurance policy.
