Understanding Life Insurance- What you Need to Know
Unfortunately, death is a part of life. Life is stressful enough without having to worry about how your final expenses will be paid, or who will handle the financial aspects of everything. I know that I do not want my own passing to create a burden for my loved ones. I want to rest assured that upon my passing, my family will be able to be taken care of. Things can definitely get messy when a loved one dies. If loose ends are not tied up, the family is left with trying to figure it all out.
I realized that I knew next to nothing about life insurance. I had no real idea about whether or not my own life insurance policy was all about when I set it up about twenty years ago. I was very worried about having everything under control for my family, and thankfully I was able to find the answers that I needed.
Would it be wise to sell my life insurance policy?
If you have a life insurance policy you can sell it for an immediate cash payment – this transaction is formally known as a life settlement.
First, you’ll need to determine if you qualify to sell your life insurance policy. A settlement provider then makes an offer based on your age, health, type of insurance, premiums and death benefit. People 65 or older can typically sell their life insurance policy as long as the face value of the policy exceeds $100,000. People sell their life insurance policies for a variety of reasons. It’s often the best outcome to provide relief from a policy they no longer need.
What is the difference between a life settlement and a viatical settlement?
A life settlement is the sale of a life insurance policy to an investor for an amount more than the policy’s cash surrender value, but less than the death benefit, or payout value to the beneficiary.
In a life insurance settlement transaction the policyholder transfers ownership to a life settlement provider. The former policy holder is no longer responsible for the policy premiums and receives a cash payment that’s larger than the surrender value of the policy. The life settlement provider is now responsible for all expenses related to the policy.
A viatical settlement is the sale of an existing life insurance policy, by someone who is terminally or chronically ill, to a third party for more than its cash surrender value but less than its face value, or death benefit. Viatical settlement is the specific term used to define a life insurance settlement where the insured party is terminally or chronically ill.
In this sense there are actually two types of viatical settlements. The first is for someone who is terminally ill. Terminally ill is defined as having a life expectancy of less than 24 months. The second is for someone who is chronically ill. Chronically ill is someone who can no longer perform two or more of the following activities; eating, using the toilet, bathing oneself, or dressing oneself. Chronically ill also describes someone who requires substantial supervision to protect him/herself from threats to health and safety.
In a viatical settlement transaction the life insurance policy holder transfers ownership to a third party. The former policy holder is no longer responsible for the policy premiums and receives a cash payment that’s larger than the surrender value of the policy. The third party, known as a viatical provider, is now responsible for all expenses related to the policy.
While the viatical settlement process is very similar to that of life settlements, there are a few key considerations for viaticals that we have highlighted in the sections below.
If you are looking for information regarding the transaction process, how policies are valued, or settlement information for someone who is not terminally ill we encourage you to read our life settlement overview.
I have heard plenty of alarming horror stories about families fighting over money. In order for a beneficiary or beneficiaries to receive their claim with the life insurance company, they need to provide a few things:
- A death certificate (a copy works).
- The policy document. This should always be saved somewhere important, and if lost, can be be found with the insurance agent who signed the policyholder.
- A claim form, otherwise known as a “request for benefits.”
Once these are successfully completed, beneficiaries can receive the payout of the policy, either all at once in a lump sum, or in installments (typically annuities). Life insurance proceeds are tax free in almost all cases, so you don’t get taxed for taking a large lump sum. The benefit of annuities is you have the option to have the death benefit reinvested on your behalf, then paid back to you over time. This could amount to a considerable difference, though it also doesn’t provide the immediate windfall for expenses that is often the intended use case for life insurance. In either case, a direct deposit or check is typically available for receiving funds.
This is a sponsored post with Mason Finance.