For seniors who have been paying for life insurance for a decade or more, their policies could now be reaching a point of high profitability thanks to their generated cash value. With the cost of living rising to the point that Social Security benefits are increasing, it’s more important for those 65 and older to consider what their retirement might look like. The most concerning impact of the COVID-19 pandemic in 2020 is the inflated cost of basic living necessities; prices rose by 7.3 percent in April 2021, pushing many with limited incomes to their financial breaking points just by financing things like groceries and gasoline.
Life insurance liquidity is one possible solution for seniors to consider taking advantage of as they reassess their financial security. Those who have already had to tap into their retirement funds are in greater need of reprieve, and that may come in the form of their long-held policies.
What Is Liquidity?
Liquidity refers to the ease of converting a financial asset into spendable cash. Life insurance has some of the highest liquidity of any financial investment, especially for seniors who have had their coverage for some time. As long as you have an eligible plan type, you can eventually surrender coverage for your acquired cash value and receive a lump sum settlement. When it comes to investments, policies and stocks are often preferred because they have higher liquidity than physical assets. Jewelry, for example, may be valuable, but it can depreciate over time and wind up costing you more than you earn back when you eventually sell it.
What Type of Life Insurance Has a Cash Value?
Whole, or permanent, life insurance is the most common form of coverage that has a cash value. Each month, a portion of your premium is set aside and put toward this value. Interest also generates on top of it, so you essentially earn money back just by paying for your policy. However, there are some forms of life insurance coverage that do not have cash value liquidity. Instead, they are invested in funds.
Variable and universal life insurance are often chosen by people for their high earning potential, but they come with downsides. While you may be able to generate wealth more quickly with them, they come with more fees than permanent coverage and cannot be sold directly for cash. Instead, you have to sell the assets you’ve acquired through your policy, such as bonds or mutual funds, to receive any kind of money. In an economic downturn, this can cause what were once valuable assets to quickly dwindle away.
Variable policies also have something called mortality and expense risk charges. Because these types of life insurance are designed more for investment than genuine protection, there are fees incurred for the holder’s recipients if they die and the death benefit has to be dispersed. While there is a surrender value to consider, it will take at least 10 years for your policy’s cash value to be equal to its surrender value. Maintaining coverage with a variable policy can quickly become expensive without the same security of financial gain as permanent coverage.
How to Sell Your Life Insurance
If you have had coverage for some time and are ready to make money from it, you can look into how to sell your life insurance policy. You could surrender it to your original provider, but this tends to net you the lowest profit. Instead, consider looking for a third-party broker who buys insurance policies. A life settlement allows you to liquidate your policy for a percentage of its death benefit amount. This amount, however, will be greater than the policy’s cash surrender value. For someone who has been paying premiums for 10 or 20 years, this can be a significant amount of money.
Before you sell anything, you should first do your research. Learn about the pros and cons of selling your life insurance, and speak with an independent financial advisor. This person will help you discern how much you should receive after fees and charges are deducted from the sales price. For seniors who have coverage they no longer want or need, settlements offer a way to profit from their investment and put their money toward more meaningful things. This could be paying your rent or mortgage, funding retirement, paying for medical bills or even paying a portion of your grandchild’s college education.
Factors to Consider When Exploring Life Settlement Options
Below are things every senior should think about before they sell their life insurance policy. Remember to always do your research thoroughly before committing to any arrangement. The more you know, the easier it is for you to protect your finances.
Your End-of-Life Costs
Even if you don’t need the level of coverage you currently have, you should consider who will pay for costs you may have toward the end of your life. This could include medical care and assisted living, in-home nurses, palliative care and funeral arrangements. If your loved ones become caretakers, the financial responsibility will fall entirely on their shoulders if you do not have other funds put in place. You may consider settling your larger policy and taking out a smaller one just for these types of costs. You could look into a 1035 Exchange, which allow you to trade one policy for another and still get a cash value without having to pay taxes on the income.
Broker Licensing
You should always confirm that the broker or company interested in purchasing your policy is licensed to operate in your state. You can check your state’s insurance commissioner database to ensure that you’re dealing with reputable professionals. You should also look online for reviews. What do past clients have to say about their experiences, and are there any court cases or complaints filed against the broker or company?
Price Accuracy
There is no standard for pricing life insurance policies. This means that you can get a quote from one buyer that seems fair, only to have another offer you more. How do you know which one is actually right? The best thing to do is request and compare several quotes. A broker can get these for you, but you will have to pay them a commission fee. The cost of financial services during this process, however, are well worth the cost. They protect your finances and ensure you receive a fair amount for your hard work and years of investment.
