The Good and the Bad in Life Settlement

Sometimes there are financial decisions that are just plain dangerous. One of those decisions is to hastily sell our life insurance for a “life settlement”. At first glance, it is a smart way of getting cash fast but people would often realize that this is not good financial move especially when this has not been thought out. Life settlement could provide anyone with a lump-sum amount fast but the long term consequences will always be there.

Oftentimes, those who are near their retirement age consider this type of transaction. Others have opted to cash in through life settlements because they do not have enough funds to support their daily needs. It could be that their 401(k) is not enough or their financial needs just increased.

. Life Settlement Explained

Life settlement is basically a transaction done between the life insurance policy holder and a third party who are interested in buying the life insurance. Years ago, the policy holder only has two options: either to sell their life insurance policy to their insurance provider or let the life insurance matures so that benefits will be provided to the intended beneficiaries. However, third-party buyers have started to come out. These companies offer lump-sum amount to life insurance policy holders in exchange for their life insurance benefits. When the policy holder dies, all benefits will proceed to the life settlement company.

There are life settlement companies who would even buy the life insurance of the policy holder even if there are premiums left to be paid. Life settlement companies would take over the payment for the remaining premium and provide the policy holder with the lump-sum they qualify for.

. The Good Thing about Life Settlement

Life settlement has been preferred by some life insurance policy holders because of the instant cash. We have to admit that times are hard and people are always looking for ways to earn money and fast. Life settlement companies should be able to provide the policy holders the lump sum payment that they need.

This type of settlement for life insurance also enables the policy holder to reap the fruits of life insurance before they pass away. Instead of leaving the entire fund to their beneficiaries, the policy holder could receive the lump-sum and enjoy the benefits of life settlement as soon as they can.

Life settlement could also enable the policy holder to transfer from one insurance company to another. The lump-sum payment of the life settlement company should be more than enough for the policy holder to buy another life insurance from a better provider. Because of fierce competition, there will always be something better and life settlement should be able to provide the cash to transfer the life insurance to another company.

. The Bad Thing about Life Settlement

While life settlement might sound like a great deal, there are dire consequences that you should consider:

Tax Consequences – If you are not in the retirement age, taxes will really cost you as this will be considered for income tax. But even though you are already at the retirement age, state and federal laws might get a good portion of your life settlement.

Transaction Cost – Aside from taxes, you might be charged with an exorbitant transaction cost. There are companies who will charge you as much as 30% of your gross lump-sum payment. Combining this with the taxes that you have to pay, you could be spending 40% of your lump-sum on taxes and transaction costs only.

Privacy – Since it is life insurance, companies might be provided free access to your health information. Before you sign up, be sure that they will provide confidentiality notice as they should only see information necessary for the transaction.