Many seniors will consider a life insurance settlement deal as they get older. For some, this is an easy way to raise a cash lump sum to use in retirement and to get rid of an unwanted policy. Others may prefer/need to keep their coverage in place as part of their estate planning. What are the benefits and downsides of selling life insurance as a senior settlement?
The Advantages of Senior Life Settlements
Senior life settlements allow individuals to sell life insurance to a third party for a cash payment. Whether this is a good idea or not comes down to the preferences and circumstances of the individual. This may, for example, work well for those that:
Are paying for life insurance coverage that they no longer actually need (i.e. they have no remaining debts to cover, they have no heirs or their families will not need financial help when they die).
Find the costs of keeping their insurance in place a burden in retirement.
Would prefer to have a cash payout to enjoy spending before they die.
Need to boost their retirement income as they cannot cope financially or have unexpected commitments such as medical expenses or long term care costs to meet as they get older.
Find that they are overinsured and would prefer to set up a new reduced coverage policy to save money.
Cannot keep their policy going but would prefer to see a return on investment rather than letting it lapse (with no return) or getting a cash surrender payout from the insurance company.
Have been diagnosed with a terminal illness and want/need cash before they die.
In some cases seniors may sell all of their coverage. It is, however, possible to sell part of a policy and to keep some of the insurance in place at the same time.
The Disadvantages of a Senior Life Insurance Settlement
It is important to take an informed view before opting to sell a policy in a life settlement deal. This may not be a good idea for some seniors. Some of the disadvantages include:
The senior will lose the policy once it is sold and the ultimate payment will be made to the third party that buys it and not to their heirs.
The settlement sum may be worth having but it will not equal the face value of the coverage.
It may be harder to get a cheap life policy at an older age and the existing policy may eat into the allowed “capacity” for some preventing them for getting enough replacement coverage.
Some may find that the cash sum that they are paid reduces/stops their entitlement to existing benefits.
A cash settlement may be taxable which could eat into the amount of cash that is actually received.
Those considering replacing an existing life insurance policy with a new one as part of a settlement deal may find it better to do this before they sell their old policy. Before choosing to take up a senior life settlement offer, it may also be worth getting independent financial advice to check that this is the right move to make.
Do Seniors Need Life Insurance Coverage in Retirement
Life insurance needs in retirement can be a lot different than in working years. Once retired, some seniors find that they may not need as much/any life coverage at all. Before deciding not to continue with a policy, however, it may be worth looking at whether there might be any benefits to carrying on life insurance after retirement.
When is a Life Insurance Plan Not Needed in Retirement?
Most people use a life insurance policy to give them protection during key periods of their lives when death may result in financial difficulty for the people they leave behind. So, for example, life coverage could help pay off a mortgage, repay debts, give a family enough money to live on and pay for future college costs.
But, once people reach retirement age they may not have the same financial needs and their family circumstances may be a lot different. Their mortgages and debts may be repaid, their kids may be independent adults and their retirement planning may leave a surviving partner and/or family enough income on its own. In these cases senior life insurance may not be necessary at all.
When Might Life Insurance be Useful for Seniors?
Some seniors do, however, have a case for continuing life insurance and some also prefer to keep coverage going even if they don’t need it. Common reasons for having a policy at this stage of life include:
To replace essential income for a spouse/partner or family that may be lost if the individual dies.
To pay off any existing debts and financial commitments.
To leave behind an additional lump sum cash legacy.
To cover estate and funeral expenses.
Each individual will have their own needs at this stage of life. For some, being able to leave policy payouts is a necessity; for others, this is simply something they prefer to do.
How to Choose the Best Life Insurance for Seniors
Those interested in taking out life insurance coverage in retirement should make sure to compare policy costs before doing so. Costs can vary in this sector and using a life insurance comparison site may be a quick and simple way of finding the best product at the lowest cost.
In the UK, guaranteed life insurance policies for the over 50s are often used at this stage of life and may give an appropriate solution. Funeral/burial insurance may also be an alternative worth considering if this is the main reason for keeping a policy in place after retirement.
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