More and more seniors are cashing in on their life insurance to fund a myriad of things. From mounting medical bills, to long-term care, to entrepreneurial aspirations, the proceeds from such a transaction can provide the funds when you need them most.
The process of selling your life insurance is referred to as a life settlement transaction. A life settlement is defined as the sale of an existing life insurance policy for more than its cash surrender value, but less than its net death benefit.
What Can I Use the Proceeds for?
A life insurance policy is an asset just like your home or car, and once you sell your policy, that money is yours to do what you like with. That being said, many people who opt for a life settlement do so to fund the following:
- Mounting medical bills
- Investing in long-term care
- Replenishing the nest egg that has been strained by record inflation
- Paying for grandchildren’s college
- Paying for travel or vacation time
- Averting bankruptcy or paying off debt
- Starting a business
Do I Qualify for a Life Settlement?
While selling your life insurance policy may sound appealing, the first step is determining if you qualify for such a transaction. Generally, policyholders must meet the following criteria, at minimum:
- Age and health: In general, to qualify for a life settlement, the policyholder should be 65 or older, though younger individuals may still qualify. Specifically, policyholders who are 72 or older and in average health qualify. Those who are 60 or older qualify if they are in below average health, and those under 60 qualify if they are in critical health.
- Type of policy: The majority of life insurance policies sold are universal or term policies, though others may still qualify.
- Premiums: The amount of premium payments required to keep the policy in force will play a role as to whether the policy can be sold or not.
- Death benefit: Also known as the face value, policies with a death benefit of more than $100,000 are usually easier to sell as they are more attractive to an investor.
Are There Penalties for Selling My Life Insurance?
If you are selling your policy at age 59.5 or before, you will incur a 10% penalty. Other than that, there are no penalties for selling your policy. There are, however, tax rules to keep in mind. Life settlements are taxed in three ways:
- Money received from a life settlement up to the tax basis is free of income tax.
- Money received that is greater than the tax basis, but less than the cash surrender value, is taxed at ordinary income rates.
- Money received that exceeds the cash value of your policy is taxed as capital gain.
The amount of taxable income is calculated by subtracting the total amount you have paid in premiums, your tax basis, from the settlement amount. The IRS provides additional information on how life insurance proceeds are taxed.
To find out if a life settlement is the right option for you, it’s important to seek professional advice. The first step is to see if you qualify for a life settlement. This can be done by filling out a simple online calculator or calling a life settlement specialist.