You probably have heard of viatical settlement somewhere and thought: “This could be a good idea.” However, is it beneficial to you? Have you looked into its pros and cons? Make sure you weigh everything down carefully before deciding to go for it.
What is Life Settlement
Basically, a life settlement is an act of selling one’s existing life insurance policy to any third party for a one-time cash payment. The cash which the insured individual may receive from selling his or her insurance policy will amount more than the surrender value. However, it always is less than the exact death benefit.
How Life Settlement works
Once an insured party decides he no longer needs his insurance policy, he may opt to sell it to an investor – can be an individual or institutional investor. Typically, the cash which the policy owners will receive is tax-free.
After the policy has been successfully purchased, the ownership will immediately be transferred out to the investor. The investor will then take over all of the aspects related to the policy. In short, investors should take care of the insurance premium fee and at the same time, he will have full right to the death benefits.
When the original insurance owner dies, the new owner will receive the entire payout since the investor automatically becomes the insured’s beneficiary right after the transfer.
Risks of Life Settlement
Just to be fair, all investments normally comes with a risk. However, there always are drawbacks that can be outweighed by the benefits. Below are the general risks of Life Settlement investment that you will have to consider:
Fraud
The most common reason why policy owners sell their insurance is due to the immediate need for cash. This necessity is often used by frauds to their advantage.
Inequitable Structure
It has been mentioned above that the money which the owner would receive from selling his policy is not entirely amounting to the death benefits. Thus, a life settlement is always not profitable for both parties. The investors would always gain most of the benefits compared to the seller.
Compliance to regulatory law
This type of arrangement is not fully recognized yet. Thus, there still is no standard law or regulation you could base yourself on. Most of the time, the regulation will vary from one state to another.
Other Alternatives aside from Life Settlement
Knowing that Life Settlement is not always as advantageous as you thought, you may want to consider other options. Take a look at these alternatives we have compiled for you:
Death Benefit Loan
Instead of entirely selling your policy, there always is an option to make a loan out of the cash value you have built up over time. Compared to selling the insurance, it is wiser to borrow the money from your policy’s cash value instead. That way, you still have something left on you.
ADB
Accelerated Death Benefit is by far the most common alternative to a life settlement. This option will allow you to still receive a portion of your death benefit. Your insurance company will be the one to provide it but this usually comes with varied eligibility requirements.
Conclusion
Although a life settlement provides a massive deal of help during moments you need immediate funds, it still is best to check its efficiency. Most research has shown how preferential this whole agreement can be, especially for sellers. Consider whether the transaction is worthy and advantageous in the long run.
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