What is a Life Insurance Settlement? | Home Insurance
Don’t feel bad if you don’t know what a life insurance settlement is all about. Most people have never heard of the practice. Here is a simple explanation. If you are aged 65 or older you can sell an insurance policy you no longer need for more than the cash value of the policy through a sale called a life insurance settlement.
The life insurance settlement transaction has been available since 1995. The purchase of the policy will probably be made through an insurance settlement company for pension or institutional fund buyers.
Here are three common reasons why a person would enter into a life insurance settlement
1. The policy is no longer needed.
78% of all insurance is initially purchased for family protection. Families with children insure the breadwinner(s) to provide for the family, pay off a mortgage and educate the children.
Now you no longer need as much insurance. A life insurance settlement would bring in more cash than you would get from the insurance company that issued the policy if you cashed in the policy.
2. The policy has a large loan.
You have borrowed the maximum amount against the policy at some point in time but not repaid the loan.
Every year you ignored the bills for interest on the loan and let those amounts be added to the amount of the principle of the loan.
Over the years, the amount of the loan plus the interest can exceed the cash value of the insurance policy. At this point, the insurance company will inform you that unless you pay some staggering amount of money the policy will lapse. In addition to having no insurance, there will probably be some gain the insurance company is required to report to the IRS. You will be taxed on the gain and there will be no money in the policy to cover the amount of the tax. You will then need to pay the tax.
The best solution available might be a life insurance settlement. Once you sell the policy, the loan transfers to the buyer. The buyer will undoubtedly pay off the loan to keep the policy in effect.
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