Life settlements are very interesting and in fact many individuals are unaware of their existence. Basically, a life settlement is when someone invests in an elderly person’s life insurance policy. What does that mean exactly? Keep reading, the answer is on its way.
Many individuals have life insurance policies. In fact, lots of people buy large life insurance policies when they are younger and their health is good. The main reason in buying the large policy is to leave something to their spouse, children, or other family members. However, over time the individual’s health may decline. A heart attack, stroke, or cancer may require costly medical treatments.
The life insurance policy then becomes an asset in the sense that the policy holder can access the cash value. After the cash value has been used up, however, the life insurance policy simply becomes another expense. Keeping up the premiums may require a home equity loan or another type of loan.
Most older individuals do not want to put money they don’t have into their life insurance policy. The result is the policy expires or the individual can continue paying premiums. Since many policy holders can no longer afford the premiums the only option seems to be to let the policy lapse. But, there is still another option. This is to allow an investor to pay you for your policy and then name that individual as the beneficiary.
For example, your life insurance policy is $1 million. You have used all of the cash value and now are stuck with premiums you can’t pay. An investor offers you $500,000 for your policy and wants to be named the beneficiary. You feel the offer is outstanding because to you the policy has no value since you can’t afford to keep it up.
The policy also has value to the investor who will receive the full $1 million at the time of your death. The payoff to the investor is the difference of $500,000. Of course, the investor will have to pay taxes on the income. Also, the time difference between buying the policy and your death could result in paying more premiums than the investor had planned on.
Life settlements appear to be a win/win situation for both the investor and the policy holder. And they are. Yet, the losers in the situation are the children or other family members who do not receive the benefits of the life insurance policy.
If you are considering life settlements you must take into account all the advantages and disadvantages. After you have examined all the information you can decide if life settlements are a good option for you, either as an investor or as a policy holder.