As selling life insurance has become more popular in recent years, people interested may hear the terms “reverse life insurance” and “life settlement” used interchangeably. However, these are not the same thing and the two options share some notable differences.
That’s why we created this in-depth guide, to cut through the misinformation and share the real facts about reverse life insurance. Read on for a closer look at what reverse life insurance really is, what the benefits are, how it differs from a life settlement, and the various reverse insurance options you have.
What is reverse life insurance?
Reverse insurance is an umbrella term for the different ways you can pull money from your life insurance policy. A life settlement is a type of reverse life insurance, as is a viatical settlement. While life and viatical settlements might be among your highest-paying options for liquidating your insurance, they aren’t the only reverse insurance strategies. Others include taking a loan or withdrawal from your life insurance, converting your policy to a long-term care benefit account, and accelerating your death benefit. Even surrendering your permanent life insurance policy back to the insurer is a form of reverse insurance (though its not recommended, as selling the policy typically provides a greater cash value).
Benefits of reverse life insurance
The primary benefit of reverse life insurance is the cash it can provide with no disruption to your investment portfolio or your home equity. Reversing your life insurance can be a powerful financial move, mostly because you may not realize the value available to you. You may have purchased the life insurance initially to provide financial security for your loved ones. But if your financial situation has changed, your insurance can instead provide financial security for you.
Once you start looking into the ways you can reverse your insurance, it’s almost like finding money you didn’t know you had. Whether your policy can produce $10,000 or $200,000 in cash, it’s money that can pay bills, repay debt, or pad your emergency fund.
Differences between reverse life insurance and life settlements
As noted, reverse life insurance encompasses several strategies to liquidate all or some of your life insurance. A life settlement is just one of the options available through reverse insurance, and it involves selling your life insurance outright to a third-party investor for cash. This is an attractive option for many cash-strapped policyholders because the payout is high — usually between 20% and 60% of the policy’s face value. As well, once the life settlement is complete, the new owner of that policy will be responsible for paying all future premiums. That new owner will also control the policy’s cash value and its death benefit going forward.
To reiterate, reverse life insurance is a broad term that includes several options for getting money from your policy, one of which being life settlements. While a life settlement means your beneficiaries will not receive a death benefit from your policy upon your passing, some other reverse insurance options may enable you to keep a portion of it depending on which you select.
Which reverse life insurance option should you choose?
When you need cash and you’ve decided to get it from your life insurance, there’s often one reverse insurance strategy that’s most suitable for you. To help you identify that right strategy, here’s a review of seven reverse insurance options and the situations where each one might make sense.
1. Loan against your cash value
If you have a sizable amount of cash value built up in your permanent life insurance, a cash value loan is a quick way to access some of that value. The main advantage of a cash-value loan is that it’s easy. Most of the time, you simply ask your insurer to send you a check. These loans do accrue interest, but the rate is usually competitive. Plus, your insurer may or may not ask you to repay the loan. Any loan amount outstanding, along with accrued interest, will be deducted from your death benefit when you pass.
A cash-value loan makes sense when you want to maintain life insurance coverage and you want your beneficiaries to receive a death benefit — even if it’s a smaller amount than you’d originally planned.
2. Withdrawal of your accumulated cash value
Some policies may allow you to withdraw some or all of your cash value. This is similar to a loan, except that you won’t accrue interest over time and there will be no repayment requirements. Your insurer will lower your death benefit by the amount you withdraw.
A cash withdrawal from your life insurance may be the right approach if your policy allows it and you can keep paying your life insurance premiums. As with a loan, your beneficiaries will receive a reduced death benefit. The amount you are able to withdraw will largely depend on how much value the policy has accumulated over the years. Those who’ve saved a lot by paying extra in premiums will have a larger sum to pull from than those who paid the minimum premiums. If the cash value isn’t enough to meet your needs, you’ll want to consider other options.
3. Conversion of your policy to a long-term care account
You could also sell your life insurance in a life settlement and then deposit the proceeds in an account that’s earmarked for your long-term care expenses. This process is called a Medicaid life settlement. In some states, you can complete a Medicaid life settlement without affecting your Medicaid eligibility. In states that don’t allow Medicaid life settlements, you generally have to surrender your insurance or spend down the proceeds from a life settlement to qualify for Medicaid.
Check with your elder care attorney to confirm that your state allows Medicaid life settlements. If it does, you’d pursue a Medicaid life settlement when you require long-term care and, not including your life insurance, are eligible or nearly eligible for Medicaid.
4. Accelerated death benefit
Your life insurance may have an accelerated death benefit feature, such as a long-term care rider or a chronic illness rider. Either rider allows you to cash out part of your death benefit while you are living if you meet certain conditions. Normally, you must have a provable medical need for long-term care. Specifically, a health professional usually must certify that you cannot perform two or more activities of daily living (ADLs) on your own. ADLs include basic tasks like eating, bathing, dressing, and continence.
Contact your insurer to find out if your policy has an accelerated death benefit feature and, if so, what the requirements are. As with a cash-value loan and cash withdrawal, you will need to continue making premium payments and the death benefit available to your beneficiaries will be reduced.
5. Life settlement
You may be eligible for a life settlement if you are 65 years or older and your life insurance has a face value of $50,000 or more. A life settlement takes a few months to complete, but at the end you will receive a lumpsum of cash. You can use those proceeds for any purpose, from funding medical treatments to repaying debt and covering retirement living costs.
A life settlement can be lucrative relative to other strategies on this list. It’s often the right course of action when you want to maximize your cash proceeds and you no longer want or need your life insurance or the death benefit. You can work with the Harbor Life Settlements team to confirm your eligibility; they’ll also provide you with a free policy valuation.
6. Viatical settlement
A viatical settlement is an option when you’ve been diagnosed with a terminal or chronic illness. It’s similar to a life settlement, in that the policy transfers entirely to a new owner and you receive a cash sum in return. You’d pursue a viatical settlement if you have an estimated lifespan of less than two years and you need to raise as much cash as possible to cover your medical bills. Harbor Life Settlements can also help you understand your policy’s value in a viatical settlement.
7. Life insurance surrender
Finally, you can surrender your life insurance back to your insurer. If you have a permanent life policy, your insurer will pay out your accumulated cash value less any surrender fees. Your insurer will also terminate your policy, which means you have no future premiums to pay and there’s no death benefit available to your beneficiaries.
A surrender is often the least attractive option, because the payout is low — if you’re lucky, you might receive 50% of what you’d get from selling your policy in a life settlement. For that reason, you’d only consider surrendering if you don’t qualify for a life settlement. The difference in cash proceeds between a surrender and life settlement is high enough that you might look into what you’d need to do to become eligible for a life settlement. Perhaps you are in your early 60s, for example. In that case, you might consider holding onto your life insurance for a few more years until you are old enough to pursue a life settlement. If you’re curious about your eligibility for a life settlement and how much your policy is worth, get a free estimate from Harbor Life Settlements!