(3 minute read)
Did you know you can sell all or a portion of a life insurance policy, even term insurance?
Life insurance can be a great way to prepare your beneficiaries for the future. Yet, for all its benefits, it can also become a burden. For those who no longer wish to keep their life insurance policy, most only know about surrendering their policy or letting it lapse.
Both of these options can be less than ideal. When surrendering, your policy likely hasn’t grown to its full value yet, and then surrender charges are also deducted. When letting a policy lapse, you do stop paying premiums, but you also forfeit the payout to beneficiaries, and you don’t get back the premiums you already paid.
Fortunately, if you find yourself in the position where you need or want to cash out on your policy early, you may qualify for other options, such as selling a life insurance policy.
This article will compare two types of life insurance settlements, including their differences, benefits, qualifications, and tax implications.
What Is a Life Settlement?
A life settlement is the sale of your existing life insurance policy. The transaction takes place on the secondary market and results in a one-time cash lump sum for the seller. The buyer assumes all future premium payments and becomes the beneficiary of the policy. The buyers of these policies are either looking to diversify their personal investment portfolio, or they are acting on behalf of an institution like a bank or investment firm.
Do I qualify for a Life Settlement?
Due to the importance and complexity of the decision, life settlements are regulated. You must meet the following requirements in order to qualify for a life settlement:
- Age 65+, but ideal candidates are in their 70s
- Life expectancy of less than 15 years, with a change in health since the policy was issued
- Policy death benefit of at least $100,000
- Policy has been in-force for at least 2 years
While this list covers the broad qualifications necessary for a life settlement, it is still important to meet with a representative from a life settlement company like Life Settlement Advisors to discuss the nuances of your situation.
How Much is a Life Settlement Worth?
Our free life settlement calculator can help you determine if you qualify for a life settlement and how much your settlement might be worth. On average, a life settlement returns 20% ($20,000 of a $100,000 death benefit), whereas most surrenders offer only $469 per $100,000.
What Percentage of a Settlement is Taxed?
Life settlement taxation falls under income tax, and you would typically owe taxes on your gains (The amount you sold it for minus the premiums you paid while holding the policy). Tax laws vary from state to state and depend on your total taxable income, so be sure to consult a tax professional during your decision-making process.
After taxes, this cash lump sum is yours to spend how you see fit, whether you’re looking to check a few items off your bucket list or pay down debt.
What Is a Viatical Settlement?
Similar to a life settlement, a viatical settlement involves selling an existing life insurance policy on the secondary market to receive a one-time cash lump sum. However, there are differences in who qualifies and how they are taxed.
Who Qualifies for a Viatical Settlement?
Viatical settlements exist for the terminally ill to receive cash for their policy and have special qualifications and benefits.
- Any age
- Life expectancy of less than two years due to a medically diagnosed terminal condition
- Death benefit of at least $100,000
- Policy has been in-force for at least 2 years
How Much is a Viatical Settlement Worth?
Viatical settlements have a higher average payout than life settlements because the buyer will have to make fewer premium payments before the payout. Typical viatical settlements sell for 50-70% of the death benefit value.
What Percentage of a Viatical Settlement is Taxed?
The seller does not pay taxes for a viatical settlement due to the urgent timing of the transaction. Whether paying expensive medical bills, moving into a more comfortable space, or taking time to travel, this money can be used for whatever you want.
Life Settlement vs. Viatical Settlement
Here is a side-by-side comparison between the two types of settlements:
- Life Settlement: Sale of an existing life insurance policy to investors in order to benefit from a cash lump sum.
- Viatical Settlement: Sale of an existing life insurance policy in response to a diagnosis of a terminal condition.
- Life Settlement: Average of at least 20% of death benefits (pre-tax)
- Viatical Settlement: Average of 50-70% of death benefits
- Life Settlement: Must be at least 65 years old, must have had current life insurance policy for at least 2 years, must have a life expectancy of less than 15 years, death benefit must be at least $100,000.
- Viatical Settlement: Must be medically diagnosed with a terminal condition, no age requirement, must have had current life insurance policy for at least 2 years, must have a life expectancy of less than 2 years, death benefit must be at least $100,000.
- Life Settlement: Considered taxable income (rates vary between states and income tax brackets).
- Viatical Settlement: Not taxed.
*Tax laws are complex and can change frequently. Always consult a tax professional or financial advisor before making major financial decisions such as a life or viatical settlement.
How Do I Know if a Life Insurance Settlement is Right for Me?
When it comes to choosing between a life settlement and a viatical settlement, your qualifications will often guide your decision-making. More often than not, the difficult decision is not which type of settlement is right for you, but is a settlement right for you at all?
A life insurance settlement trades the future death benefits of the policy for an immediate cash payout and relief from monthly premium payments. When deciding whether or not a settlement is right for your situation, you’ll need to consider your current financial needs and how a policy change will impact any beneficiaries. At Life Settlement Advisors, we work with policyholders that are considering a life settlement.
Life settlement companies like Life Settlement Advisors are trained to navigate the complex financial, legal, and emotional decisions that come with managing your life insurance. Contact us to start planning for your future, today.
Did you know you can sell all or a portion of a life insurance policy, even term insurance? Selling an unwanted life insurance policy is no different than selling your car, home, or any other valuable asset that will create immediate cash. Contact us today to learn more.
Life Settlement Advisors