Talk to your loved ones and close friends before making the decision. There may be other options, such as a personal loan or the sale of something you own. You can also get information about federal and state benefit programs. For example, some programs help people get medical assistance for the uninsured.
understand your life insurance policy
Your policy or certified document will specify the type of policy and describe the options available to convert your life insurance into income. here’s what you need to know:
Do you have a group or individual life insurance policy?
- group life insurance policies are offered to people who belong to a specific organization, such as through an employer, association, or union. With a group plan, the policy is issued to the group and a certificate is issued to individual members as proof of coverage.
- Individual life insurance policies can be purchased directly from an insurance company or through an insurance agent or broker. are available to those who meet the insurer’s guidelines and pay the required premiums.
- Permanent life insurance provides coverage for your entire life, regardless of your health status. this type of policy accumulates a cash value, which can be used as a loan source or collateral for a loan.
- term life insurance generally covers your life for a specified period of time, usually 1, 5, 10, 15, 20, 25, or 30 years. most term policies don’t build cash value, but can still be used to convert to income.
- The loan must be repaid with interest or your beneficiaries will receive a reduced benefit when you die.
- You should be able to do a simple loan transaction using the insurance company’s forms and receive your money quickly if your policy allows loans.
- Your credit rating or other assets are not considered for this type of loan.
- You must pay the interest on the loan or your policy may lapse (close). Your policy will provide a loan interest rate that is either fixed (will not change) or variable (likely to change). find out how much you will pay in interest.
- You and the beneficiary named in your life insurance policy must agree on the loan amount and payment terms.
- To protect the beneficiary who will give you the loan, you will either designate an irrevocable beneficiary (cannot be changed) or assign the policy (legally transfer the policy to another person). It will also agree on the premium payments so that the lender has guarantees that the policy will remain in force and will not expire.
- If you don’t use an attorney to prepare the loan agreement, consider having one review the loan agreement before you sign the contract.
- is terminally ill with a life expectancy of two years or less.
- has a specific disease.
- has a long-term care illness.
- One advantage of accelerated benefits is that your beneficiary receives the money that was not advanced.
- on the other hand, if you sell your policy, your beneficiary will normally not receive any money.
- policy age.
- your age.
- health status.
- type of insurance.
- premium amount.
- amount of death benefit.
- insurer rating.
- your state of residence.
- If you decide to sell a policy you got through your employer, the buyer will likely contact your employer for more information. this means that someone he works with could learn about his health status.
- The buyer (company or individual who buys the life policy) becomes the owner and collects the face value of the policy after death.
- You’ll need to contact several viatical or life settlement providers to find out their guidelines for buying and how much your policy would be worth. do it yourself or through an insurance broker, paying a fee.
- can’t keep paying premiums.
- the policy is no longer necessary.
- You may not sell it for more than the cash surrender value.
- If your policy surrenders shortly after purchase, there may be very little cash surrender value.
- Many states have laws that allow you to change your mind if you decide that terminating your policy is not in your best interest. Generally, this decision must be made within three months of the cancellation of your policy. check with your state insurance commission for the specific rules in your state.
Do you have a term or permanent life insurance policy?
Here are some common methods for turning life insurance into income:
get a loan from your life insurance company
When a loan is made against a life insurance policy, the lender generally expects the policy’s death benefit to be paid after the policyholder dies, and will generally not be required to repay the loan during your lifetime.
If you have a permanent life insurance policy, you may be able to get a tax-free loan through the insurance company with no questions asked about your health or finances. the amount you can borrow and the interest rate are specified in the life insurance policy. you must continue to pay premiums.
issues to consider:
get a loan from other lenders
If you have a term or permanent life insurance policy, but your policy does not allow loans, you can use your life policy as collateral for a loan from other lenders. for example, a beneficiary or other third party may be willing to give you a loan with an agreement to repay the policy’s death benefit (as beneficiary).
issues to consider:
accelerated (health) benefits
Available for both term and permanent life insurance policies, accelerated benefits (or living benefits) are like cash advances. allow you to receive money from your policy if you:
The amount of money paid to the policyholder, plus any applicable interest or fees, is deducted from the amount paid to the beneficiary when the policyholder dies. accelerated benefits may also eliminate or reduce your premiums while maintaining policy status.
issues to consider:
sell life insurance policy (viatical and life settlements)
Selling a life insurance policy for income (also known as viatical settlements or life settlements) is available to both term and permanent policyholders. To learn about this option, contact someone with experience valuing a life insurance policy, such as a life settlement broker or possibly the insurance company or your insurance agent. Consult a tax expert about the effect the following options will have on your tax situation.
viatical settlements are transactions in which a person with a reduced life expectancy sells his or her life insurance policy at a price lower than the policy’s death benefit, but higher than cash surrender value. the buyer assumes the payment of the premiums and becomes the owner of the policy.
Life settlements (also known as senior settlements) are similar to viatical settlements, except that the person selling the policy does not need to have a limited life expectancy. life settlements are more common for older people who have some type of life-shortening health condition.
To be sold, the policy must include a provision allowing transfer (legal ownership transferred from one person to another). The amount of money for a life insurance policy settlement depends on:
Your state insurance department can send you contact information for licensed buyers and brokers of life insurance policies. or you can contact the life insurance settlement association for a list of their members.
issues to consider:
terminate and surrender life insurance policy for cash
If there are no other ways to access the money in your life insurance policy, you may decide to cancel your policy and drop the coverage. You will receive the cash surrender value outlined in the policy. Available to permanent policyholders.
This option usually reports less money than the sale of a policy. premium payments end and no beneficiaries are named. Taxes are paid on the amount of the settlement that exceeds the amount of premiums you paid to the insurance company. you may also have to pay a surrender charge to terminate the insurance policy contract. cash ransom may be a good option for you if:
issues to consider:
donating your life insurance policy
As a last resort, you might consider donating the policy to a qualified organization, which could result in a tax deduction for you. discuss your specific situation with a tax planning professional. this can be a complicated and unlikely scenario. Also talk to your chosen charity, as not all charities can or will accept life insurance as donations.
before converting your life insurance policy into income
See also: Participating insurances | Geisinger
Consider the effect this may have on your benefits and financial situation. For example, if you receive a government or state benefit based on your income, such as supplemental social security income or food stamps, the money you receive from converting your life insurance policy into income could affect your ability to qualify for programs. financial assistance or change the amount you receive.
If you need or want money now, the only way to determine which would work best for you is to look at each alternative and compare the numbers. Keep in mind that what you receive now will decrease or possibly eliminate the amount your beneficiary will receive later.
belth, joseph m. life insurance. Indiana University Press: Indiana, 1985.
landay, david s. be prepared: the complete financial, legal, and practical guide to living with cancer, hiv, and other life-challenging conditions. new york: st. martin press, 1998.
“Life insurance basics”. assure.com. life insurance basics October 24, 2006. http://info.insure.com/life/basics.htm
petersen, david. seminar: financial planning for people with hiv/aids. new york, 1994.
“what you need to know about buying life insurance.” info.gov. federal center of citizen information. October 24, 2006. www.pueblo.gsa.gov