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Life insurance fits a variety of financial situations, thanks to the diversity of products available. However, your needs can change. Sometimes, you no longer need coverage and want to stop paying premiums. A life insurance settlement can help you exchange your policy for a payout. Read on to learn how life insurance settlements work, some types of settlements, and the steps you can take to sell your policy.
A life insurance settlement occurs when a policyholder sells their life insurance policy to a third party other than the original insurer. This third party is called a life settlement provider. The life settlement provider becomes the policy’s beneficiary and assumes responsibility for paying premiums. If it’s a traditional life settlement, the life settlement provider receives the death benefit payout when the former policyholder passes away.
A life settlement typically offers a larger payout than the cash surrender value, or the amount you’d get from your insurer if you surrendered the policy.1 However, this process may involve more work since you must shop for offers from different life settlement providers, and can take longer overall. Policyholders can hire licensed life settlement brokers to help them find offers. This may be a good option for policyholders who no longer need coverage and want to maximize the proceeds they receive for giving up their policy.
In general, you should be at least 65 or older to sell a life insurance policy. Laws vary, but you may be able to sell younger than 65 if you have a terminal illness or other qualifying diagnosis.1
Life insurance settlements can take up to a few months to finalize.2 Additionally, many states have waiting periods that must pass before you can sell your policy in a life insurance settlement.1 Policies with larger death benefits may sell faster since they are more attractive to settlement companies.
Life insurance settlements come in numerous forms. Here are some common types of settlements:
A traditional life settlement involves selling the entire policy to the settlement company for a one-time payout. This is the simplest type of settlement and offers the largest payout. However, the settlement company receives the entire death benefit, leaving none for other beneficiaries.
A retained death benefit settlement lets you keep some of the death benefit portion while selling the remainder to a settlement company. The settlement company takes over premium payments.
As a result, you can turn a part of your policy into a cash benefit and eliminate all future premiums while ensuring loved ones still receive some of the death benefit. However, you’ll have to pay a portion of the premiums.
Hybrid settlements are a broad type of settlement that lets you customize the settlement amount and payout arrangements to your needs. For example, a hybrid settlement could entail selling part of the policy and receiving the payout in fixed installments instead of a lump sum.
Don’t wait until it’s too late. Help cover yourself and your family with coverage from Aflac.
Here are the steps you can take to sell your life insurance policy:1
Keep in mind that life settlement proceeds in excess of total premiums paid may be taxable.3
Although life insurance settlements are similar to viatical settlements, there are some key differences between the two. Viatical settlements are a special settlement type for policyholders with qualifying terminal or chronic illnesses. These settlements typically provide larger payouts than other settlement types, allowing the policyholder to help cover costs associated with the illness, such as procedures and medications.
Additionally, viatical settlements are typically not taxable.2 This can give the seller more funds to help cover treatment costs and replace some of your income. However, policyholders should check with a tax professional just in case.
Determining whether a life insurance settlement is the right choice depends on several factors unique to each individual's circumstances. Firstly, you should evaluate your current financial situation and future needs. If you no longer require coverage or anticipate difficulty paying premiums, a life settlement might offer a solution. However, weigh the potential benefits against the long-term implications for your beneficiaries since they will lose the death benefit. Consult with financial advisors and explore alternative options. Determine whether a life settlement aligns with your priorities and goals to make an informed decision.
Life insurance settlements let you get out of your policy if you no longer need it by turning it into a cash benefit. Now that you understand a helpful option for cashing out life insurance, you can shop for policies more confidently, and Aflac is here to help. Contact an agent today to explore our policy options, including term life and whole life insurance, and get a quote.
1 Forbes - What Are Life Settlements? Pros, Cons & How They Work. Updated August 16, 2023 https://www.forbes.com/advisor/life-insurance/life-settlements/. Accessed May 1, 2024.
2Annuity.org - Life Insurance Settlements. Updated October 31, 2023. https://www.annuity.org/selling-payments/life-insurance-settlements/. Accessed May 1, 2024.
3CPA Practice Advisor - Federal and State Taxation of Life Settlements. https://www.cpapracticeadvisor.com/2023/04/26/federal-and-state-taxation-of-life-settlements/78887/. Accessed May 1, 2024.
Aflac coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, Aflac coverage is underwritten by American Family Life Assurance Company of New York.
Aflac life plans - 68000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. 65000 series: In Virginia, Policies ICC0965JTO & ICC0965JWO. B61000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B61JWO & ICC18B61JTO.
In Delaware, Policies B61JWO, B61JTO. B60000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Q60000 series/Whole: In Arkansas & Delaware, Policy Q60100M. In Idaho, Policy Q60100MID. In Oklahoma, Policy Q60100MOK. Not available in Virginia. Q60000 series/Term: In Delaware, Policies Q60200CM. In Arkansas, Idaho, Oklahoma, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C. Not available in Virginia.
Aflac Final Expense insurance coverage is underwritten by Tier One Insurance Company, a subsidiary of Aflac Incorporated and is administered by Aetna Life Insurance Company. Tier One Insurance Company is part of the Aflac family of insurers. In California, Tier One Insurance Company does business as Tier One Life Insurance Company (Tier One NAIC 92908).
In AR, DE, ID, OK and VA: Policies ICC21-AFLLBL21 and ICC21-AFLRPL21; and Riders ICC21-AFLABR22, ICC21-AFLADB22, and ICC21-AFLCDR22. Aflac Final Expense policies are not available in New York.
The content herein is provided for general informational purposes and is not provided as tax, legal, health or financial advice for any person or for any specific situation. Employers, employees and other individuals should contact their own advisers about their situations. Receipt of accelerated death benefits may affect eligibility for public assistance programs. Benefits may also be taxable, and are not expected to receive the same favorable tax treatment as other types of accelerated death benefits that may be available.
Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY or VA. Benefits/premium rates may vary based on state and plan levels. Optional riders may be available at an additional cost. Policies and riders may also contain a waiting period. Refer to the exact policy and rider forms for benefit details, definitions, limitations, and exclusions.
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