Alternatives To Selling Your Life Insurance Policy

Rebecca Parson
Rebecca Parson

Rebecca Parson

Author

Rebecca Parson is a financial and tech writer with 10 years of experience writing about topics such as life insurance, commodities investing, and the SaaS industry. She has a master’s degree from Johns Hopkins University and a bachelor’s degree from the University of Mary Washington. Her writing has appeared at money.com, sacbee.com, cart.com, herodevs.com, blanchardgold.com, and more.

Brian OConnel
Brian OConnel

Brian O'Connel

Contributor

Brian O’Connell has been a contributing writer for U.S News & World Report since 2016. A former Wall Street bond trader and the author of two best-selling books; “The 401k Millionaire” and “CNBC’s Creating Wealth”, he has 20 years experience covering business news and trends, particularly in the business and financial sectors. He believes education is the best gift a financial consumer can receive – and brings that philosophy to every story he writes. His byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, TheStreet.com, Yahoo Finance, CBS Marketwatch, and many more.

By Rebecca Parson, Brian O'Connel
Author, Contributor, Life Insurance

Is There an Alternative to a Life Settlement?

Yes, there are actually a few different paths you can take instead of a life settlement. You might look into a Retained Death Benefit, which lets you sell your policy but still hang on to some of the death benefit for your family. Or, you could tweak your premiums to make them more affordable, borrow some cash against the value of your policy, hand the policy off to a relative, or figure out how to make your policy work within your bigger money picture.

Life insurance is like a safety net—it gives you peace of mind and helps keep your loved ones financially secure if you die. But sometimes, life changes, and you might think about stopping or giving up your life insurance policy. Before you do that, it’s important to look at different choices that might work better for you. In this post, we’ll talk about other things you can do other than a life settlement or surrendering your life insurance policy.

Here are the main alternatives to a life settlement:

  • Retained Death Benefit: If a policy owner cannot afford to keep premiums on their policy but still needs the insurance, a Retained Death Benefit type sale may be their best option. A Retained Death Benefit is an arrangement in which the policy owner sells their policy to a third-party buyer in exchange for a portion of the death benefit. The purchaser of the policy names the original policy owner or their designee as a partial beneficiary on the policy. The purchaser is responsible for all premium payments on the policy, and when the policy matures, the original owner gets a portion of the death benefit. Depending on the specifics of the transaction, there may be an additional cash payment from the purchaser to the seller for the policy. 
  • Premium Optimization: Premium optimization provides a solution for those struggling to keep up with high life insurance premiums. This process involves thoroughly examining your existing insurance policy by reviewing the minimum amount the insured has to pay to keep the policy in force. Often, the billed premiums include an investment component and are significantly more expensive than the minimal cost of insurance
  • Policy Loan: If your policy has a cash value and you need funds, you can often borrow against the policy’s cash value. Borrowing against the policy means borrowing from the insurance company using your policy’s cash value as collateral for the loan. This option is only available for a policy with a cash value and is only available up to the amount of the cash value. A life settlement, on the other hand, can often net far more than the cash value.
  • Policy Transfer: If you have an unwanted life insurance policy or a policy on which you cannot afford the premiums, transferring the policy to a relative may be the best course of action. Transferring ownership can come with many benefits and drawbacks, so making sure it is the right decision for your situation is essential.
  • Prioritize Your Policy: As a senior, you may have many financial assets, with only one of them being a life insurance policy. You may also have a house, real estate assets, and a stock portfolio. While many seniors may have different investments or savings strategies, it is essential to consider the benefits of saving your life insurance policy for your beneficiaries as part of your overall financial plan. It may make financial sense to sell a stock or some real estate so that you can leave over the full death benefit to your children. 
  • Accelerated Death Benefit: Some life insurance plans include a perk called an accelerated death benefit rider. If you get very sick and have a life expectancy of less than two years, you can get some of the money early that would usually be paid out after you die.

Choosing the right alternative depends on your unique financial situation and the needs of your loved ones. By carefully considering each option, you can make an informed decision that maximizes the value of your life insurance policy while ensuring your family’s financial security. Remember, it’s not just about the immediate benefits but also about long-term peace of mind for you and those you care about.

alternative to a life settlement
There are many alternatives to a life settlement you can explore.

What Is A Retained Death Benefit (RDB)?

If a policy owner cannot afford to keep premiums on their policy but still needs the insurance, a Retained Death Benefit type sale may be their best option. 

A Retained Death Benefit is an arrangement in which the policy owner sells their policy to a third-party buyer in exchange for a portion of the death benefit. The purchaser of the policy names the original policy owner or their designee as a partial beneficiary on the policy. The purchaser is responsible for all premium payments on the policy, and when the policy matures, the original owner gets a portion of the death benefit. Depending on the specifics of the transaction, there may be an additional cash payment from the purchaser to the seller for the policy. 

It is important to note that Retained Death Benefit type sales may have tax implications and should be carefully considered with the help of a financial advisor or tax professional. Additionally, specific regulations and requirements must be met for the sale to be valid and legally binding. 

For instance, consider a policyholder named John, who has a life insurance policy worth $500,000. Due to financial constraints, he cannot keep up with the premium payments. However, he wants his dependents to benefit from the policy upon passing. John decides to enter a Retained Death Benefit arrangement with a life settlement provider, selling his policy to a third-party buyer, Tom. Tom agrees to pay all future premiums. They agree that upon John’s death, 40% of the death benefit, which is $200,000, will be retained by John’s beneficiaries. The remaining 60% is to be paid to Tom. 

In addition, Tom pays John an initial $20,000 for the policy. This way, John ensures that his beneficiaries still get a portion of the death benefit, he no longer has to worry about the premiums, and he gets some immediate cash that he can use to meet his financial needs.

What happens if the purchaser Fails to Make Premium Payments on the policy?

The buyer is responsible for all future premium payments in a Retained Death Benefit arrangement. If the purchaser fails to make these payments and the policy lapses, the original policy owner may lose their right to any portion of the death benefit. Therefore, it is crucial for both parties to outline their responsibilities and obligations in the agreement clearly. To make this scenario less likely, brokers advise sellers to require at least a portion of the purchase price as an upfront cash payment. The purchaser is then disincentivized from allowing the policy to lapse as they would lose the initial lump sum payment they made to the seller. 

Related Read: Life Insurance Lapse: Understanding Why Policies Lapse

Do I Qualify For An Advanced Death Benefit?

Many policies have a clause that allows for an advanced death benefit, also known as a living benefit or accelerated death benefit. This benefit is an option for policyholders who are terminally ill and in need of financial support during their final days. 

However, not all policies have this feature, so it’s important to understand if you qualify before making any assumptions.

Here are some factors to consider when determining if you qualify for an advanced death benefit:

  • Type of policy – The first thing to consider is the type of life insurance policy you have. Both term life and permanent policies can offer an advanced death benefit, but it may not be available on all policies. The percentage of face value a life insurance company will offer for an Advanced Death Benefit can range from 25% to 95%, depending on the policy. Reviewing your policy documents or speaking with your insurance agent to confirm if this option is included is important.
  • Terminal illness – Each insurance company may have a different definition of what qualifies as a terminal illness. Generally, it’s considered to be an illness that is expected to result in death within a specific time frame, such as 12-24 months. Some policies may also have specific requirements for the type of illness or medical condition that qualifies.
  • Qualifying Event – To receive the advanced death benefit, you must provide proof of a qualifying event, typically that the insured has a chronic or a terminal illness with a short life expectancy. Proving this qualifying event may include submitting medical records, doctor’s notes, or a letter from a healthcare professional confirming the diagnosis. It’s important to follow the specific guidelines outlined by your insurance company to receive this benefit. It is important to note that the life insurance company will not attempt to recover any money paid out even if the insured goes into remission or is completely cured of the terminal illness. 
  • Waiting period – Most policies have a waiting period before the advanced death benefit can be accessed. This waiting period can range from a few months to a year, so reviewing your policy and understanding the waiting period requirements is important. Some policies may also cap the amount that can be advanced or limit the number of times this benefit can be accessed.
  • Impact on the death benefit – Receiving an advanced death benefit will impact the final payout of your life insurance policy. The advanced amount will be deducted from the death benefit paid to your beneficiaries upon your passing. It’s important to consider this impact and discuss it with your loved ones before deciding.
  • Tax implications – Generally, an advanced death benefit is not subject to income tax. However, if you have a significant life insurance policy or receive multiple advances, it’s important to speak with a tax professional to fully understand any potential tax implications.’

Reviewing these factors and carefully considering your options before accessing an advanced death benefit is important. It can provide peace of mind and financial support during a difficult time, but it’s essential to understand the impact on your policy and loved ones fully. Your insurance agent or financial advisor can help guide you through the process and ensure that you make an informed decision based on your situation. 

Remember, every policy is different, so it’s essential to thoroughly review your policy and understand its features before making any decisions related to an advanced death benefit.

What Are The Minimum Premiums Required To Keep My Life Insurance Policy Active?

As a policy owner who wishes to retain their insurance policy but is contending with affordability constraints, understanding the concept of “Premium Optimization” can be crucial. This term refers to the minimum amount you must pay to keep your policy active. It’s important to note that this approach varies from the typical level premium approach, which aims to accumulate account value over time. 

Your insurance company can provide a policy illustration outlining the minimum fixed payments necessary to keep your policy active. This information can help you calculate future premiums, but you may need an actuary to run the numbers. These calculations can be complex, and the insurance company does not usually provide the minimum premiums you will owe to keep the policy in force. 

You may not need to pay the total level premium amount to keep the policy in force in the short term. Level premiums include the amount necessary to keep the policy in force for the current year and a contribution to the account value. While building account value in the early policy years prevents high premiums in the later years, paying the minimum premium reduces the amount needed to maintain your policy. 

By understanding these factors, you can navigate the complexities of your insurance policy and find a viable solution to keep your insurance active. Please remember that this approach requires a deeper understanding of your policy’s cost of insurance charges and interest rates. It is advisable to consult with a financial advisor or insurance professional to help you fully comprehend these details and make an informed decision.

Transferring Your Life Insurance Policy To A Relative

If you have an unwanted life insurance policy or a policy on which you cannot afford the premiums, transferring the policy to a relative may prove to be the best course of action. 

Transferring ownership can come with many benefits and drawbacks, so making sure it is the right decision for your situation is essential.

Tax Implications

One of the main benefits of transferring ownership to a relative is that you can maintain coverage without paying any taxes on the transfer. If your policy has cash value, your relative can assume ownership without worrying about paying capital gains taxes. Additionally, transferring ownership relieves you of all future premium obligations. 

In addition, the death benefit, when received, may also be non-taxable, provided that the new owner made no payment in consideration of the policy transfer. However, there are also some drawbacks to transferring ownership. For example, if the new owner passes away, the policy benefits will likely be subject to estate taxes. This can result in a significant decrease in the value of your policy and may defeat the purpose of transferring it in the first place. 

Additionally, you give up control over your policy once you transfer ownership.

Suppose you do decide that transferring ownership to a relative is right for you. In that case, consulting with a qualified financial advisor or attorney is important to ensure all necessary paperwork is completed correctly. This is especially true if your policy has significant cash value. You will want to ensure that the transfer is done according to the laws and regulations governing such transfers.

Another essential factor to consider before transferring ownership of your life insurance policy is the potential impact on your eligibility for government benefits. For example, if you rely on Medicaid or other government assistance programs, transferring ownership may affect your eligibility and result in the loss of these benefits.

Beneficiary Change

It is also important to note that in some cases, it may be possible to simply change the beneficiary of your policy instead of transferring ownership. This may be a more straightforward solution if you simply want someone else to receive your policy benefits.

It should be noted that although transfer to a relative is the most common type of policy transfer, it can also be transferred to a friend, favorite charity, or anyone else the policy owner desires. As long as the policy is transferred gratis, the proceeds of the policy in most cases will remain tax-free.

How Soon Can I Borrow From My Life Insurance Policy?

If your policy has a cash value and you need funds, you can often borrow against the policy’s cash value. Borrowing against the policy means borrowing from the insurance company using your policy’s cash value as collateral for the loan. This option is only available for a policy with a cash value and is only available up to the amount of the cash value. A life settlement, on the other hand, can often net far more than the cash value.

Advantages of Policy Loans

Borrowing against your policy has several advantages over selling it outright:

  • Reversible: Once you repay the loan, the policy is the same as before the loan. You will likely pay interest on the borrowed funds. However, if you sell the policy, the sale cannot be reversed after the rescission period by “paying back” the money you received.
  • No tax implications: Unlike selling your policy, borrowing against it typically has no tax implications. This is because the cash received from a loan is not considered income.
  • Simplicity and Speed: Borrowing against a policy is typically a matter of filling out a form requesting the loan. Unlike a life settlement, there are no lengthy contracts, medical record requests, or extended negotiations.

Disadvantages of Policy Loans

While taking out a policy loan may seem like a good option, there are also some disadvantages to consider:

  • Accrual of interest: Policy loans accrue interest that must be paid back like any other loan. If you fail to repay the loan, it can result in the policy being surrendered or terminated.
  • Reduction of death benefit: Borrowing against your policy reduces the overall death benefit amount. Your beneficiaries will receive the face value minus any loans upon your demise.
  • Risk of policy lapse: If the interest on the loan is not paid, it can lead to a decrease in cash value and, if not recouped, could potentially cause the policy to lapse if the cash value reaches zero. This could result in the loss of coverage.

Before Borrowing Against Your Policy

Before deciding to take out a policy loan, you should consider the following factors:

  • Repayment terms: Understand the loan’s repayment terms outlined in your policy.
  • Impact on beneficiaries: Consider how borrowing against your policy may impact your beneficiaries and their financial security in the event of your death.
  • Alternatives: Explore other options, such as life settlements or alternative forms of financing, before deciding to borrow against your policy.
  • Financial stability: Ensure that you have a recurring source of income to make loan payments and avoid defaulting on the loan. This includes considering potential changes in financial circumstances, such as job loss or health issues.
  • Professional advice: It is important to consult with a financial advisor or a trusted insurance professional before making any loan decisions about your policy. They can provide insight and guidance on the best course of action for your specific situation.

Borrowing against your life insurance policy can help you obtain the necessary funds without completely surrendering your coverage. However, it is important to consider the potential consequences if you do not pay back the loan. Carefully considering your options will help you make a well-informed decision that aligns with your financial objectives.

Prioritizing Your Life Insurance Policy

As a senior, you may have many financial assets, with only one of them a life insurance policy. You may also have a house, real estate assets, and a stock portfolio. While many seniors may have different investments or savings strategies, it is important to consider the benefits of saving your life insurance policy for your beneficiaries as part of your overall financial plan. 

Suppose you cannot afford the premiums for your life insurance policy and determine that it is in your interest to retain ownership for estate planning purposes. In that case, it is advisable to carefully assess all your financial assets and identify any potential items that can be sold or used as collateral to help you pay premiums on your policy. 

Some examples include;

  • Primary Residence: Seniors can sell their homes and transition into smaller, more cost-effective living spaces. This strategic move unlocks substantial previously tied-up capital, providing newfound financial flexibility.
  • Stock Market Portfolio: Seniors could consider selling off a portion of their stock portfolio. Although this comes with risks, it can be an effective way to generate cash quickly.
  • Retirement Accounts: Annuities or other retirement accounts may allow for partial withdrawals without incurring penalties. The availability of this option depends on the type of account and the senior’s age.
  • Reverse Mortgage: A reverse mortgage is another viable option for seniors who own their home. A reverse mortgage allows homeowners (there is an age requirement) to borrow against the value of their home while still maintaining ownership. The loan and accrued interest can be repaid upon the sale of the house or in the event of their passing. The reverse mortgage can provide much-needed cash for seniors and help alleviate financial stress without requiring the sale of the home.
  • Valuable Items: If seniors have valuable items such as jewelry, art, or collectibles, selling these assets can also provide a quick influx of cash. However, appraising these items is vital to ensure they get a fair price.

After thoroughly assessing your entire portfolio, you may still opt to sell your policy. However, you can now proceed with assurance, secure in the knowledge that you are making a prudent and financially responsible choice.

It is important to ensure you have enough cash to cover premiums until the policy matures. If the policy lapses, you will lose all premiums paid into the policy. If there is any doubt regarding future premium affordability, it may be prudent to consider a life settlement option.

In A Life Settlement, Will My Personal Information Be Protected?

Are Life Settlements Confidential?

As with any financial transaction, it is natural for individuals to have concerns about the privacy and confidentiality of their personal information during the life settlement process.

Fortunately, life settlements are highly regulated to protect the interests of everyone involved. These regulations include strict guidelines for collecting, using, and sharing personal information.

In most cases, the only individuals with access to your personal information during a life settlement are those directly involved in the process, such as the life insurance company, broker or provider, and any necessary third-party service providers.

Furthermore, state laws also require that all parties involved in a life settlement maintain confidentiality of personal information and adhere to strict privacy policies.

Providers, brokers, and buyers will not share your personal health information will not be shared with anyone outside the necessary parties without your explicit consent.

Additionally, it is important to note that all communication during the life settlement will go through secure channels, such as encrypted email or secure online portals.

You can trust that your personal information will be protected when working with a trusted life settlement broker and a licensed life settlement provider.

What Do I Need To Sign To Complete The Life Settlement?

To complete a life settlement, the policy owner must sign several documents. These include a life settlement contract, which outlines the terms and conditions of the transaction, as well as various forms and disclosures required by state laws.

Some of these forms may include information about your health history and financial situation, but rest assured that this information will be confidential and only used to evaluate your life settlement eligibility. You will also be required to sign a Limited Power of Attorney to allow the buyer of your policy access to future health information.

It is important to carefully review all documents before signing them and to consult with a financial or legal advisor if needed. Reviewing the documents with a trusted professional will ensure that you fully understand the terms of the life settlement and are making an informed decision.

The paperwork you must sign to complete a life settlement is done to protect the sellers’ and buyers’ interests and ensure a fair and transparent process. Your personal information is confidential and only accessed by those necessary to complete the life settlement transaction. 

Do I Have To Authorize Continued Access To My Health Information?

As mentioned, you must sign a Limited Power of Attorney (LPOA) as part of the life settlement closing process. This document grants the buyer of your policy access to your future health information to monitor your health, a necessary step that buyers require before agreeing to purchase a policy.

However, this authorization applies to all medical records, not just those related to your current health condition. It is important to understand that this information is used solely to monitor your health and does not give the buyer any decision-making authority over your medical care.

It is also important to note that the policy owner can revoke this authorization at any time. If you no longer wish for the buyer to access your health information, you can simply inform them in writing, and the LPOA authorization will be terminated.

If you have any questions about the process’s confidentiality, please contact us today for a no-cost consultation!