On this page
What's next
Earn a high-yield savings rate with JG Wentworth Debt Relief
Can a Life Settlement Help with Retirement Planning?
by
JG Wentworth
•
October 16, 2024
•
7 min
Retirement is a major milestone in life, and for many, it’s the reward for decades of hard work. However, as people approach retirement, one of the biggest questions they face is whether they have enough savings to support their lifestyle after they stop working. With rising healthcare costs, longer life expectancies, and the unpredictability of markets, many individuals are seeking alternative ways to bolster their retirement funds. One increasingly popular, yet lesser-known option is a life settlement. But can a life settlement really help with retirement planning? Let’s explore the details.
What is a Life Settlement?
A life settlement is the sale of a life insurance policy to a third party for a cash payout. When you sell your policy, you receive a lump sum payment that is generally higher than the policy’s cash surrender value but lower than the death benefit. The buyer, often an institutional investor, then becomes the policy owner, taking over the premium payments and collecting the death benefit when the original policyholder passes away.
Life settlements are generally geared toward individuals over the age of 65, although some younger policyholders with significant health issues may also qualify. If you’re no longer in need of your life insurance policy or you find it too expensive to maintain, a life settlement can provide immediate liquidity, offering cash that can be used for a variety of purposes, including retirement.
How Can a Life Settlement Boost Retirement Income?
As retirement nears, many individuals find that their savings and investments may not be sufficient to maintain their desired standard of living. Here’s how a life settlement can potentially alleviate that stress:
1. Immediate Cash Infusion
When you sell your life insurance policy through a life settlement, you receive a lump sum of cash. This immediate infusion of funds can supplement your retirement savings, providing extra income for essential expenses like healthcare, housing, or even leisure activities.
For retirees who find themselves asset-rich but cash-poor, a life settlement offers a way to liquidate an asset that might otherwise provide little immediate value. This can be especially helpful in covering unexpected costs or bridging gaps in income.
2. Relief from Premium Payments
Maintaining a life insurance policy can be costly, especially if you’re on a fixed income in retirement. If you’re no longer in need of the policy, the premiums can become a burden. By selling your policy, you free yourself from future premium payments, which can help conserve your other retirement assets. This can be particularly useful if the policy has become unaffordable due to changes in your financial situation.
3. Alternative to Surrendering the Policy
Many retirees who no longer need their life insurance policy consider surrendering it to the insurance company for its cash surrender value. However, a life settlement usually provides a higher payout than surrendering the policy. The extra money can then be invested or used to cover expenses, adding more flexibility to your retirement plan.
4. Flexibility in Using the Payout
Unlike certain retirement accounts or annuities, the payout from a life settlement comes with no restrictions on how the funds can be used. You have the freedom to decide how best to allocate the cash — whether it’s to pay off debt, invest, cover medical costs, or simply enhance your retirement lifestyle.
Get Cash From Your Life Insurance Policy
Get Cash From Your Life Insurance Policy
When Does a Life Settlement Make Sense for Retirement?
While a life settlement can provide additional retirement funds, it’s not suitable for everyone. There are a few key scenarios where a life settlement might be a smart choice for retirement planning:
1. No Longer Need the Policy
If your original reason for purchasing life insurance no longer applies — for instance, if your children are financially independent or your spouse is well-provided for — a life settlement allows you to unlock the value of your policy without maintaining it.
2. Struggling with Premium Payments
If paying your life insurance premiums has become a financial strain, a life settlement could relieve you of the obligation to continue making those payments. This can be particularly beneficial if your retirement income is fixed and you need to prioritize other expenses.
3. In Need of Liquidity
If you’re facing large, unexpected expenses — such as medical bills, home repairs, or long-term care costs — a life settlement provides immediate cash. This can help avoid dipping into other retirement accounts or investments, which might have tax implications or penalties.
4. Policy is Underperforming
If your life insurance policy hasn’t accumulated as much value as you anticipated, or if it’s a universal or variable policy that isn’t performing well in the market, a life settlement may give you a better return than holding onto the policy.
Considerations Before Opting for a Life Settlement
Although a life settlement can be a valuable tool in retirement planning, there are several important factors to consider before proceeding:
1. Tax Implications
The proceeds from a life settlement may be taxable. While the amount received that exceeds the policy’s basis (the total premiums paid) could be taxed as income, the portion of the payout that represents the death benefit may be tax-free. It’s important to consult a tax professional to understand the specific tax implications for your situation.
2. Impact on Estate Planning
Selling your life insurance policy removes the death benefit from your estate, which could affect your heirs. If your life insurance policy was intended to provide for your loved ones after you pass, you’ll need to carefully weigh the benefits of selling the policy now versus keeping the death benefit for their future.
3. Eligibility
Not all life insurance policies qualify for a life settlement, and not all policyholders will be eligible. Typically, older individuals (65+), or those with a declining health status, are more likely to qualify for a life settlement. Additionally, the size of the policy, the premium amount, and the type of policy all play a role in determining eligibility.
4. Fair Market Value
Understanding the fair market value of your life insurance policy can be tricky. The amount you receive in a life settlement will depend on a variety of factors, including your age, health, and the terms of the policy itself. It’s wise to shop around and consult with a financial advisor to ensure you’re getting the best offer.
5. Fees and Commissions
Life settlements are typically brokered through third parties, who may charge fees or commissions. It’s important to factor these costs into your decision and ensure you understand how much of the sale proceeds will be going to intermediaries.
Conclusion: Is a Life Settlement Right for Your Retirement Plan?
A life settlement can be a powerful tool to help enhance your retirement plan, offering immediate cash and relief from premium payments at a time when income may be limited. However, it’s not a one-size-fits-all solution, and careful consideration is needed before moving forward.
If you no longer need your life insurance policy, are facing financial strain, or want to bolster your retirement income, a life settlement could offer a solution. But before making any decisions, it’s important to consult with financial advisors, tax professionals, and estate planners to ensure it aligns with your broader retirement goals.
For many, a life settlement can provide an unexpected lifeline, transforming a stagnant asset into a powerful source of retirement income — but it’s crucial to approach this option with a full understanding of its implications.
About the author
The information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
