Life insurance plays a significant role in financial planning for seniors who are managing retirement income and long-term care costs. However, many are also starting to wonder if they can turn their life insurance policy into something useful today, rather than just a future benefit for their heirs.
The options on the market can be confusing. The term “reverse life insurance” frequently appears in online searches and conversations. However, the truth is that there is no such product. There is, however, a powerful life insurance payout alternative — a life settlement.
Read on to learn how a life settlement works, how it compares to so-called reverse life insurance, and whether it could make financial sense for you or someone you love.
WHAT PEOPLE MEAN BY ‘REVERSE LIFE INSURANCE’
There is no official product called reverse life insurance. You will not find it listed in a policy brochure or offered by insurance companies. But people use the phrase when trying to figure out how to convert a life insurance policy into cash.
Many people searching for reverse life insurance are:
- Looking for ways to get money for retirement
- Paying premiums on a policy they no longer need
- Curious about selling their policy for a lump sum payout
They may have heard from a friend or read online that it is possible to “cash out” of a life insurance policy, and that’s where the confusion starts. Some assume that reverse life insurance is a formal option, similar to a reverse mortgage, which allows homeowners to convert part of their home equity into cash.
In reality, what most people are thinking of is a life settlement. This is a real and regulated financial transaction that allows you to sell part or all of your life insurance policy for a cash payout that you do not have to repay.
HOW LIFE SETTLEMENTS WORK
A life settlement is a transaction where you sell your life insurance policy to a third party for a lump sum. The payout for a life settlement is typically greater than the policy’s cash surrender value but less than the full death benefit.
Once the policy is sold, the buyer takes over future premiums and receives the death benefit when you pass away.
To qualify for a life settlement, you typically need to:
- 1. Be over age 65
- 2. Have a whole life, universal life or other permanent policy with a death benefit of at least $100,000
- 3. Have held the policy for at least two years (which varies by state)
- 4. Have changes in your health status since you purchased the policy
Let’s take Judy, a 76-year-old woman with a $250,000 universal life insurance policy. Her children are grown, she is retired, and the premiums are starting to strain her fixed income. After working with Life Settlement Advisors, she sells her policy for a $60,000 lump sum payment and rids herself of any future premiums.
This is a much better option than letting the policy lapse or taking the $15,000 surrender value from the insurance company. That is the power of a life settlement. It turns something you no longer need into cash you can use today.
REVERSE LIFE INSURANCE VS. LIFE SETTLEMENTS: WHAT’S THE DIFFERENCE?
Reverse life insurance and life settlements are often used in the same breath, but they are not the same thing. Think of “reverse life insurance” as a casual term. It is not a product. It is more like a search phrase, or a placeholder people use when they are unsure what the real option is. On the other hand, a life settlement is a legitimate, regulated transaction. It involves paperwork, legal review and protections for both the seller and buyer.
OTHER TERMS CONFUSED WITH REVERSE LIFE INSURANCE
When people search for ways to get cash from their life insurance, “reverse life insurance” is not the only phrase that causes confusion. There are a few other options that sound similar, but each one works differently:
- Viatical settlement: This is similar to a life settlement but for terminally ill individuals. The payout is often higher, and it is based on the life expectancy of the insured.
- Cash surrender: If you cancel your policy, your insurance company may pay you a surrender value. This amount is usually much lower than what you would get from a life settlement.
- Accelerated death benefit: Some life insurance policies let you access part of the death benefit early if you are diagnosed with a serious illness. This is not a sale, but more like a loan against your coverage.
Each of the options above works in different situations. However, a life settlement usually delivers the highest value when you simply no longer want or need a life insurance policy.
WHEN A LIFE SETTLEMENT MIGHT MAKE SENSE
Selling a life insurance policy is not for everyone. But in the right situation, it can provide real financial relief.
Here are a few times when a life settlement might be the right choice:
- You no longer need life insurance.
- The premiums have become too expensive.
- Your estate planning needs have changed.
- You could put the money to better use, such as paying for medical expenses, long-term care, retirement or gifting to family.
The key is to determine whether selling your life insurance policy aligns with your financial goals. At Life Settlement Advisors, we have helped people understand their options and take smart steps with their life insurance.
Whether you are looking for peace of mind, retirement flexibility or extra income, our team can walk you through the life settlement process.
DON’T LET AN UNWANTED LIFE INSURANCE POLICY GO TO WASTE
Reverse life insurance might not exist, but the financial need behind the phrase is very real. If you are carrying a life insurance policy that no longer fits your goals or your budget, it is time to rethink how that asset could work for you.
A life settlement offers a straightforward way to unlock the value in a life insurance policy you may no longer need. Instead of letting it lapse or accepting a low cash surrender value, you could sell it for a meaningful lump sum.
Ready to find out what your policy is worth? Reach out to Life Settlement Advisors today and explore your options — there’s no pressure, just guidance you can trust.
