As the new year approaches, many people take a fresh look at their finances—reviewing out-of-pocket expenses, ongoing premiums, and areas where they may be paying for things they no longer need. Life insurance is often one of those items.

Policies taken out years ago may no longer fit current financial goals, family situations, or budgets. For some policyholders, a life insurance settlement can be an option worth considering as part of that annual financial reset.

Pros and Cons of a Life Insurance Settlement

A life insurance settlement (also known as a life settlement) allows a policyholder to sell an existing life insurance policy to a third party in exchange for a lump-sum payment. This payment is typically higher than the policy’s cash surrender value, but less than the policy’s death benefit.

Pros

A life insurance settlement can provide immediate cash, which may be used to cover rising living expenses, medical costs, long-term care, retirement needs, or debt. For policies with high or increasing premiums, selling the policy can eliminate an ongoing financial burden.

In many cases, policyholders receive significantly more than they would by surrendering the policy back to the insurance company.

Cons

Once a policy is sold, the original beneficiaries will no longer receive the death benefit. The proceeds from a settlement may be partially taxable, depending on the policy and the amount received. The process can also be complex, involving brokers, buyers, and legal documentation, which may impact the final net payout.

Additionally, sellers must be comfortable sharing personal and medical information as part of the evaluation process.

Typical Parameters Required for a Life Insurance Settlement

Not all policies qualify for a settlement. Buyers typically look for several key factors, including:

• Age of the insured: Generally, 65 or older, though some younger individuals with significant health issues may qualify
• Policy size: Usually a minimum death benefit of $100,000 to $250,000, depending on the buyer
• Policy type: Permanent policies such as universal life, whole life, or convertible term policies are most common
• Health status: Medical conditions that reduce life expectancy often increase settlement value
• Premium structure: Policies with manageable or predictable premiums are typically more attractive

What the Seller Should Beware Of

Sellers should be cautious when choosing a broker or settlement provider and confirm that all parties are properly licensed in their state. It’s important to clearly understand fees, commissions, and how they affect the final payout. Policyholders should also be aware that after the sale, the buyer becomes the policy’s beneficiary and may periodically request health updates.

Finally, sellers should consider the long-term impact on estate planning and beneficiaries and consult with a financial advisor, tax professional, or attorney before moving forward.

Schedule your yearly meeting today so that, with your financial advisor and accountant, we can help you make an informed decision!