Written by Lingke Wang, Co-Founder of Ovid Corp.
Life settlements are a powerful retirement tool many people don’t know about. It’s the sale of one’s life insurance policy to an investor – usually a large financial institution. Often times, seniors who have purchased life insurance before they were retired find themselves in situations where their policy is no longer serving their financial needs. In these types of situations, life settlements can be a great alternative to cancelling or surrendering the policy. Currently, over 80% of life insurance policies never result in a claim – meaning our dollars are just going towards the insurance companies’ profits.
Life settlements work like this: you receive an upfront cash payment in exchange for transferring ownership of your life insurance policy to a third party investor. The investor then continues to make the annual premium payments for the policy, and when the insured passes away, the investor collects the policy death benefit. The economics are similar to a life annuity – a common financial planning tool.
Life settlements were originally created in the 1980s to help seniors unlock the cash value of their life insurance. Every year, you pay premiums into a life insurance policy. But often times, circumstances will have changed since when you first purchased the policy – you may end up wishing that you no longer had this ongoing premium expense, or that you could get money out of the policy to pay for other expenses, like medical bills. This is where life settlements comes in – helping you monetize an asset that you didn’t know you had.
When Should I Consider a Life Settlement?
Life settlements can meaningfully alter your household finances, but it isn’t for everyone. There are three general situations where you might consider a life settlement: (1) you can no longer afford your policy’s premiums (2) you need to free up cash – to finance a purchase or to pay for a large upcoming expense, or (3) you no longer need the life insurance coverage.
1. You can no longer afford your life insurance
In this scenario, most people would lapse their life insurance policy – stop paying the premiums and let the policy become void. Unfortunately, this option results in forfeiting all of the policy’s value and losing all of the previously paid premium payments. A life settlement can be a much better option in this scenario because it will help you recover some or all of the money that you’ve paid into the policy.
Premiums can be unaffordable for two reasons. Either your financial situation has changed and you can no longer afford premiums, or the premium cost has escalated as you’ve grown older – a common feature of universal life insurance policies.
2. You need to free up cash for another expenses
Need to pay for an upcoming medical expense? Want a new vacation home in Florida or to live abroad? Want to pay your grandson’s college tuition? Life is expensive – sometimes more expensive than we have anticipated. If you have an old life insurance policy, it could be used to fund something important to you.
3. Your life insurance coverage has outlived its use
Most of us purchase policies to protect our children in case of an unexpected passing. However, after many decades, many seniors find that their coverage is no longer necessary because their dependents are now financially independent. A life settlement can help turn this obsolete policy into cash value.
Life insurance can be complex – and there are often several options when you are presented with one of these life scenarios. If you have built up a large cash value in the policy, in addition to a life settlement, your other alternatives include borrowing against that cash value or surrendering the policy. Start by speaking with your financial advisor and/or your life insurance agent to be informed about all the options and features of your policy.
Ovid Corp. is the leading life settlement exchange, where consumers can sell their life insurance policies through our auction platform to institutional investors. For more information about Ovid please visit www.ovidlife.com or call 800-311-OVID.