​5 Things to Consider Before Letting a Life Insurance Policy Lapse

Each year approximately 500,000 seniors let their life insurance policies lapse, walking away from over $100 billion in benefits. That is a lot of money that seniors are giving up for nothing. Unfortunately most seniors who have let a policy lapse say they would have considered selling it had they known they could.
 
The process of selling a life insurance policy is known as a life settlement. This involves selling an existing life insurance policy to a third party for more than the policy's cash surrender value, but less than the death benefit. Life settlements can be a valuable source of liquidity for people who would otherwise surrender their policies or allow them to lapse, or for people whose life insurance needs have changed, but they are not for everyone.
 
The amount you will receive depends on several factors, including your age, health and the terms and conditions of your policy. In addition to paying you a lump sum for your policy, the buyer agrees to pay any additional premiums that might be required to support the cost of the policy for as long as you live. In exchange, the buyer will receive the death benefit when you die.
 
 
Reasons to Sell Your Life Insurance Policy
Each person’s situation is unique, and reasons for selling a policy will vary, but ultimately a sale will occur when a person no longer needs, wants, or can afford their policy. This may happen when:

• A person has retired, with mortgages paid off and kids through school.
• The policy may be too expensive to keep making payments.
• One spouse may have passed away, leaving the other with no need for life insurance.
• A home or other real estate has been sold, leaving no need for the coverage.
• Financial needs such as paying for assisted living, or in home care may become urgent.

 
 
Factors to Consider When Deciding to Sell Your Life Insurance Policy
​Life settlements have proven to be profitable for institutional investors. As a result, competition among life settlement providers has become increasingly intense. Because the life settlement industry may target seniors who could be in poor health, it can be prone to aggressive sales tactics and abuse. This does not mean that you should never consider a life settlement. A life settlement might make sense for you if you no longer want or need your current policy, or if you can no longer afford the expense of paying insurance premiums. Even if these factors apply to your situation, you should proceed with caution and consider the following issues:

1. Ongoing Life Insurance Needs: If you are considering buying a new policy with the proceeds of the life settlement, you will need to determine whether you will be able to get a new policy with equivalent coverage and at what cost. You might want to consider options such as reducing your existing amount of coverage or making a 1035 Exchange. A 1035 Exchange is a tax advantaged method for swapping an individual’s life insurance coverage from one policy to another.  

2. Less Costly Alternatives: If one of the factors driving your decision is a need for cash, be aware that surrendering your life insurance policy for its cash value or pursuing a life settlement are not your only options. If you still want coverage you might consider borrowing against your policy. Also some policies offer accelerated death benefits, which allow an individual with a long-term, catastrophic, or terminal illness to receive benefits on his or her policy before dying.

3. Difficulty Determining a Fair Price: One of the hardest things to know when you are selling a life insurance policy is whether you are getting a fair price. The best way to make sure you are getting a fair price is to shop around.  

4: Impact on Your Finances: A cash payment from a life settlement can have unintended financial consequences, especially if your financial circumstances have changed from when you first bought the policy. For instance, if you currently receive Medicaid benefits, a life settlement could impact your ability to participate in that program.  

5. Impact on Your Survivors: Carefully consider your need for immediate income against the future financial needs of your survivors.  
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Before you proceed with a life settlement, be sure you fully understand the financial implications for you and your family. You may want to consult your attorney, accountant or trusted financial professional.