As a retiree, you are likely hoping to enjoy your “Golden Years” without having to worry about finances. If you are concerned that may not be the case, one potential source of financial assistance that you may not have considered is your life insurance policy. Let’s explore how a “senior Life settlement” from your life insurance policy works.
What Is a Senior Life Settlement?
You have likely been paying the premiums on your life insurance policy for years – maybe even decades – with the understanding that the policy proceeds will be paid out to your named beneficiaries upon your death. While it may give you peace of mind knowing that your loved ones will benefit from what is often a significant amount of money after you are gone, it may also be difficult to know that all that money is untouchable to you while you are alive – or is it? A senior life settlement, also referred to simply as a “life settlement,” turns your life insurance policy into an untapped asset.
In simple terms, a senior life settlement involves selling an existing life insurance policy to a third party (a company other than the company from which you purchased the policy) for more than the policy’s cash surrender value, but less than the net death benefit. For example, imagine that you have a life insurance policy with a death benefit of $1,000,000 and a current cash surrender value of $200,000. If you opted for a life settlement you would sell that policy to a company for an amount that is more than $200,000 but less than $1,000,000. The third party would then take over the premium payments on the policy and the company would then be entitled to receive the death benefit payout upon your death.
The amount you are offered for your policy will vary from one company to another and will typically be calculated based on the amount of your policy premiums and your life expectancy. The reality is that most companies offering life settlements will only consider purchasing a policy if the owner is at least 65 years or has been diagnosed with a terminal illness.
Is a Senior Life Settlement the Answer?
It can be very tempting to jump at the chance to take a life settlement if you are a senior who didn’t plan well for retirement, has experienced an unexpected financial downturn, or who is facing significant and unanticipated medical bills. A senior settlement can be an excellent solution; however, you should always consult with your financial advisor and your estate planning attorney before deciding to move forward with a settlement. In addition, you should consider the following factors:
- Future life insurance needs – if you purchased the policy many years ago as a way to ensure that your spouse and/or children would be taken care of if something happened to you, the odds are good that the initial need for the policy has since disappeared. In that case, a senior settlement may make sense.
- Tax consequences – if you receive a large lump sum settlement it will likely come with some significant tax consequences. One option to discuss with your accountant is a 1035 exchange. Like the name implies, it effectively allows you to exchange one asset for another similar one without paying capital gains taxes.
- Impact on assistance – if you are currently receiving state and/or federal assistance, such as Medicaid, you could lose your eligibility for that assistance of you receive a large sum of money.
- Survivors – while your children may be grown, and your spouse may have pre-deceased you or is no longer dependent on you, you shouldn’t assume they do not need the proceeds of your insurance policy. Even if they are financially stable, they may be counting on those proceeds to cover your funeral and burial expenses.
Please download our FREE estate planning checklist. If you have additional questions or concerns about a senior life settlement or other estate planning issues, contact us at the Northern California Center for Estate Planning & Elder Law by calling (916)-437-3500 or by filling out our online contact form.