Think Twice Before You Sell Your Life Insurance

-Lauren Bloom, ESQ, January 2010

The stock market crash of 2008 devastated most people’s investments portfolios.  For many seniors, the crash came at a particularly bad time.  Unlike younger adults, older workers and retirees may not be able to wait for the market to recover before they have to live on what they’ve saved for retirement.  As a result, some seniors are selling their life insurance policies in an effort to repair a portion of the damage that the stock market crash inflicted on their retirement nest eggs.

These sales, commonly known as “life settlements,” are usually facilitated by life settlement brokers who then arrange for investment companies to purchase the policies.  The new owners pay any remaining premiums on the policies and name themselves as the beneficiaries, thus receiving the death benefits when the individuals insured (usually the original owners) pass away. 

In exchange for the policy, the original owners receive lump sum settlements that usually exceed the cash surrender value of the policies.  In effect, the payment is greater than the amounts that the original owners would have received if they simply surrendered their policies to the insurance company.

Life settlements can seem like an attractive option to older individuals who believe that they may no longer need life insurance, but they can have unintended consequences. 

Selling a policy through a life settlement deprives the original beneficiaries of the funds they would have received if the original owner had kept the policy.  In other words, if you sell your life insurance through a life settlement, your loved ones will lose the protection you provided for them by purchasing the insurance in the first place. 

The life settlement process can be bureaucratic, requiring lots of paperwork.  Policyholders who enter into life settlements should also expect to have their medical records examined, and they may have to endure periodic inquiries from the new owners about whether and when they can collect the death benefits.

For individuals who have a short-term need for cash, taking a loan against a policy, or obtaining a partial payout through an accelerated death benefit may be a better alternative than selling the insurance outright.

It’s usually a good idea to talk with an independent financial advisor and explore options with your insurance company before you cash out a policy through a life settlement.  Thoughtful planning could save you and your loved ones from long-term regrets.