Life Insurance Cash-Out Settlements – Q & A

What is a life insurance cash-out settlement?

A life insurance cash out, also referred to as life insurance settlements, is the process by which you sell your life insurance policy to a third-party buyer for a specified sum of cash that is less than the full death benefit under the policy.

How does a cash-out settlement work?

In essence, the third-party buyer of your policy becomes the legal beneficiary of the death benefit in exchange for the cash you receive from the third-party. In addition, the third-party assumes the legal obligation to make all future premiums on the policy.

These types of transactions are part of a rapidly growing industry. You can choose to contact a life settlement company directly or choose a broker to help you shop for the highest cash settlement available. Different companies have different rates of exchange with respect to how much they are willing to pay in exchange for the death benefit.

Will the third-party buyer require my disclosure of my medical information?

You will be asked to complete an application and sign a release allowing the potential third-party buyer of the policy to access your medical records to evaluate the value of the settlement. After the assessment of your current medical condition against the anticipated cash value of the policy upon your death, the company will then be prepared to make you a formal offer.

What happens should I accept the offer?

Upon your acceptance of the offer legal documents are drawn up and an escrow account is opened. You are paid upon the successful closing of escrow. You will receive the money and the third-party will receive the legal right to collect the death benefit.

What factors should I consider before I decide to sell my policy?

  • Consider discussing the matter with your family and close friends.
  • Obtain the assistance of an independent financial adviser?
  • Determine the cash value of your life insurance policy from an independent policy appraiser.
  • Try to get at least three separate offers. A trusted insurance broker may be able to facilitate this for you.
  • Find out if your testamentary beneficiaries are willing to pay the remaining premiums on your policy in order to protect their inheritance.
  • Find out if the potential third-party buyer of the policy is legally licensed to do business in your state.
  • Determine if you will have to pay taxes on some or all of the money you receive.
  • Find out if the cash you receive will affect your eligibility to receive future government benefits such as Social Security.

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