The various types of insurance that consumers purchase are generally viewed as a necessary expense that policy holders don’t think about much in everyday life, except to grumble about the cost of the premiums. But those who hold life insurance policies have some new options to choose from if they decide to forego their coverage. Life insurance settlements now allow seniors to sell only a portion of their policies and keep the remainder as they see fit. This flexible option can make sense in many cases for seniors who no longer need or can afford their current policy.

Read on for more about these new life insurance choices. (For related reading, see: 5 Insurance Policies Everyone Should Have.)

Morbid Beginnings

The life settlement industry began during the AIDS epidemic of the 1980s, when viatical settlement companies would offer to buy the life insurance policy from a terminally ill policy holder who was expected to die within six months. The owner received cash up front to pay medical bills, and the viatical company collected the death benefit. This industry has matured since those days. Firms now offer policy owners who wish to sell their policies a much more streamlined and efficient program.

The New Options

The life settlement industry now allows seniors who own policies that are no longer needed or affordable a way to get more cash from them than they could by simply accessing the policy’s cash value. The settlement company purchases the policy from the individual, then pays the premiums until the death of the insured and collects the death benefit. This type of arrangement can provide a substantial benefit for seniors who own policies that have become unnecessary, such as if the policy holder gets divorced or a spouse passes away.

Retained life benefits represent the latest innovation in the life insurance industry. Until now, healthy seniors who wanted to sell their policies were required to sell the entire policy and forego all of the coverage that it provided. But now it is possible to sell a percentage of the policy and still retain a portion of the death benefit protection without the need for future premium payments. This can make sense when the insured still has a need for a lesser amount of coverage or cannot afford to pay the cost of premiums that may have risen due to the growing costs of insurance in the policy. (For related reading, see: How Technology Is Quickly Disrupting the Insurance Industry.)

This strategy is most appropriate for whole life policies with a death benefit ranging from $1 million to $20 million. It resolves the policy owner’s dilemma of completely canceling all of their coverage or being forced to pay what are, in many cases, rising premiums. The owner is relieved of the burden of paying the premiums but still retains a measure of coverage for the beneficiaries. Perhaps the most common scenario for this would be if the policy owner’s spouse died or divorced him or her, so protection for that person is no longer necessary—but the owner would still like to provide a residual benefit for their kids. The policy owner is effectively removed from bearing the burden of the policy while still keeping that benefit for their offspring. Policy owners will need to consult with their tax advisors regarding the tax treatment of the sale.

The Bottom Line

The life insurance industry continues to move forward by offering more ways that consumers can access the death benefits in their policies. Retained life benefits can help seniors to fund their golden years by offering a more profitable way for them to exit their policies. They now stand beside accelerated benefit riders that allow policy owners to access a portion of their death benefit to pay for expenses related to disability or long-term care. (For related reading, see: Industry Handbook: The Insurance Industry.)

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