A life settlement for seniors can provide a way to turn a life insurance policy that is no longer needed or has become too expensive into cash. Rather than surrendering the policy to the insurance company or allowing it to lapse, qualifying policy owners can sell their existing coverage for a lump sum payment that is greater than the policy’s cash surrender value but less than its death benefit.
Life insurance needs change over time. Children may be financially independent, a mortgage may be paid off, estate planning needs may have changed, or increasing premiums may make a policy difficult to maintain. In these situations, finding out what the policy may be worth in the life settlement market can help you make a more informed decision before giving up the coverage.
What Is a Life Settlement for Seniors?
A life settlement is the sale of an existing life insurance policy to a third-party purchaser. Life settlements generally involve insureds age 65 or older, although age alone does not determine whether a policy qualifies.
If you accept an offer, ownership of the policy and beneficiary rights are transferred to the purchaser. The purchaser becomes responsible for future premium payments and receives the death benefit when the insured passes away. You receive the agreed-upon cash payment for the policy.
The proceeds belong to you and can generally be used however you choose.
Who Qualifies for a Life Settlement?
There is no single age, policy size, or health condition that guarantees that a life insurance policy will qualify.
Potential purchasers evaluate several factors, including:
- The insured’s age
- The insured’s health and life expectancy
- The policy’s death benefit
- The type of life insurance policy
- Current and future premium requirements
- Loans or advances against the policy
- The issuing insurance company
- Other factors affecting the cost and value of maintaining the coverage
Age is important, but it is only one part of the evaluation. Health and the economics of the individual policy can significantly affect whether a purchaser is interested and how much they may be willing to offer.
What Types of Life Insurance Can Seniors Sell?
Several types of life insurance may qualify for a life settlement.
Universal life insurance is one of the most common policy types sold in the life settlement market. Whole life, variable life, survivorship policies, and certain term life policies may also qualify.
Term life insurance requires special consideration because many term policies expire without providing permanent coverage. A convertible term policy may have settlement value if it can still be converted to permanent insurance. If you own a term policy with an approaching conversion deadline, it is important to have the policy evaluated before that conversion period ends, preferably 6 months prior to expiration of the conversion privilege.
Can I Cash Out a Life Insurance Policy Over 65?
If you’re looking to cash out life insurance policy over 65, surrendering the policy to the insurance company may not be the only way to receive cash from your coverage.
A life settlement provides another possibility for qualifying seniors. Instead of receiving only the available cash surrender value, you sell the policy in the secondary market. A qualifying policy may be worth substantially more than its surrender value.
This distinction can be particularly important for policies with little cash value. Cash surrender value and life settlement value are not the same thing because a potential purchaser considers factors beyond the amount of cash accumulated inside the policy.
Before surrendering a policy or allowing it to lapse, having it evaluated can help determine whether additional value may be available.
Why Do Seniors Sell Their Life Insurance Policies?
A life insurance policy purchased years or even decades ago may no longer serve the same purpose it did when it was issued.
Common reasons policy owners consider a life settlement include:
- The policy is no longer needed
- Premium payments have become unaffordable
- The policy owner is considering surrendering the coverage
- Estate planning needs have changed
- Cash is needed for healthcare or other expenses
Selling a policy also eliminates the policy owner’s responsibility for future premium payments because that obligation transfers to the new owner.
How Much Can a Senior Receive from a Life Settlement?
There is no standard percentage of the death benefit that a senior will receive.
Every policy is evaluated individually. A potential purchaser considers the insured’s age and medical condition, the amount of coverage, the premiums necessary to maintain the policy, policy loans or advances, and other factors before determining what they may be willing to pay.
The resulting offer is less than the policy’s death benefit but, for a qualifying life settlement, usually far greater than the cash surrender value.
This is why online estimates based primarily on age and death benefit cannot determine exactly what an individual policy will sell for. A more complete evaluation requires both policy and medical information.
Is Selling Better Than Surrendering a Life Insurance Policy?
It can be, but the answer depends on the individual policy.
When you surrender a policy, the insurance company terminates the coverage and pays the available cash surrender value. When you complete a life settlement, a purchaser acquires the policy and pays an agreed-upon amount for it.
For a qualifying policy, that settlement amount is greater than the cash surrender value.
However, not every policy qualifies for a life settlement. If you are already considering surrendering a policy, having it evaluated before making that decision allows you to determine whether a life settlement may provide additional value.
What Happens After I Sell My Life Insurance Policy?
Once a life settlement is completed, you no longer own the policy.
The purchaser becomes the new policy owner, assumes responsibility for future premiums, and designates the beneficiary who will ultimately receive the death benefit. You and the policy’s previous beneficiaries generally no longer have rights to the policy benefits after the transfer.
Because selling the policy changes both ownership and beneficiary rights, seniors should understand these consequences before accepting an offer.
Are Life Settlement Proceeds Taxable?
Life settlement proceeds may be taxable depending on the circumstances. Tax treatment can depend on factors such as the policy owner’s cost basis, policy values, and the amount received from the sale.
Receiving settlement proceeds may also affect eligibility for certain needs-based government benefits, including Medicaid or Supplemental Security Income.
These considerations do not necessarily mean selling a policy is a poor choice, but they should be understood before completing the transaction.
Find Out Whether Your Life Insurance Policy May Qualify
If your life insurance needs have changed, your premiums are becoming difficult to afford, or you are considering surrendering or lapsing your coverage, find out whether the policy may have value before giving it up.
Settlement Group can evaluate your life insurance policy to determine whether it may qualify for a life settlement and whether a potential purchaser may be interested in making an offer. Contact us today for a no-obligation policy review. 912-882-0840