Chapter 7
Chapter 7
A life settlement is not always the right option so it is important to understand the alternatives. Here is a general outline of others options you have with your life insurance. Remember, this is meant to give you a general understanding of the alternatives so please speak with a financial advisor regarding any decision you make. If it is helpful, our 1-minute calculator can provide you a quick estimate of how much you could get from your policy.
You can withdraw part of the cash value that you have built up in your policy if you need liquidity. Note that in most cases, this will reduce your ultimate death benefit.
If premiums affordability is the issue, you may be able to adjust the amount of premiums you are paying annually if you own an adjustable premium or universal life insurance policy. Again, this will result in reducing your death benefit
If you've built up some cash value in your policy, you can actually use it to pay your premiums. Of course, this only lasts as long as you have cash value remaining. Many policies do this automatically if you skip payments but you should check just in case. You also have to be mindful of when your cash value runs out - skipping a payment when you have no cash value can result in lapsing your policy.
If you are in need of liquidity, another option is to take out a policy loan. Essentially you borrow from the insurance company using your cash value as collateral. The interest rate for your loan is specified in your contract and is typically around 9%.
Unlike standard loans, you don't have to pay this loan back if administered properly. The amount you owe (including interest) is ultimately deducted from your death benefit. You can use this money in any way you want, whether to pay off premiums, pay for a large expense, reduce debt, etc.
Although it sounds great, keep in mind that this isn't free money. You will still have to make interest and premium payments. It's possible to structure the loan in a manner where your cash value and dividends pay for these amounts so it doesn't come out-of-pocket. However, if everything is not structured properly, or if you live longer than expected, the interest and premium expenses can consume all of your cash value and cause your policy to lapse.
Furthermore, if you have a loan outstanding while the policy lapses, it may result in a taxable event which can be especially dangerous if you are not prepared for such a situation. If you are considering this option, make sure you speak to your insurance agent and a financial adviser to be sure the loan is structured properly and that you understand all of the risks.
Surrendering your policy is the process by which you cancel your policy and withdraw your full cash value. Most insurance companies will charge a surrender fee which you should take into account. Finally, the proceeds you receive from surrendering the policy is a taxable event. Be sure to consult a tax adviser to discuss the implications.