A life settlement occurs when someone sells their life insurance policy to a third party for a one-time cash sum. People choose to cash out their life insurance policy before death for a wide range of reasons, but here are some of the most common:
Your dependents are financially responsible.
One of the primary reasons people get life insurance in the first place is to lessen the financial burden on others upon their death. When you are young, you may have dependents who are yet to be financially responsible and would be severely impacted by that burden. However, as you grow older, your dependents may have established financial responsibility and no longer need the money a death benefit would pay out.
You want more money for retirement.
One of the most common reasons people cash out their life insurance policy is to fund retirement. Especially in the most recent economic downturn, you may find yourself needing a bit of extra cash as you enter into retirement. The money you receive can be used for anything – living expenses, accumulated bills, or even travel.
You want to give your loved ones a gift.
It’s natural to want to give your loved ones an inheritance while you are still alive and can watch them enjoy it. People often use the money they make from a life settlement to travel with family, fund college educations, and more. Depending on your unique situation, this can prove an extremely rewarding option.
Your health status has changed.
Those who are terminally ill often consider viatical settlements and use the cash they receive to pay for medical treatment, long-term care, and more.
You are 65+.
As you age and your life changes, so does the need for a life insurance policy. Furthermore, as you get older, the money you can get for your policy gets larger, which is why a lot of individuals choose to explore selling when they reach the age of 65.
You want relief from a monthly payment.
Some people cash out their life insurance policy because they simply no longer want to pay a monthly insurance premium. A life settlement allows you to access the cash equity of the policy while reducing the financial burden of having a recurring payment.
You have medical bills or debt to pay off.
The money you receive from selling your life insurance policy can be used for anything at all, even medical bills or other debt. Having accumulated bills or debt, especially from a sudden medical emergency, can be daunting and debilitating – cashing out your life insurance policy offers a solution.
You want the tax benefits.
When you cash out your life insurance policy, the proceeds are taxed as regular income. However, the IRS defines “proceeds” as the settlement amount minus the premiums you have paid. Therefore, you only pay taxes on the profit you make from the sale.
You want to fund long-term care.
Many individuals require long-term care as they get older. The expenses associated with nursing homes, in-home care, and assisted living homes are staggering – so much so that many people choose to sell their insurance policies and use the profit to fund their care or purchase a long-term care insurance policy.
Want to learn how to cash out your life insurance policy? Check out our comprehensive guide.