Life insurance plays a significant role in financial planning for seniors who are managing retirement income and long-term care costs. However, many are also starting to wonder if they can turn their life insurance policy into something useful today, rather than just a future benefit for their heirs.
The options on the market can be confusing. The term “reverse life insurance” frequently appears in online searches and conversations. However, the truth is that there is no such product. There is, however, a life insurance payout alternative – a life settlement.
There is no official product called reverse life insurance. You will not find it listed in a policy brochure or offered by insurance companies. But people use the phrase when trying to figure out how to convert a life insurance policy into cash.
Many people searching for reverse life insurance are:
- Looking for ways to get money for retirement
- Paying premiums on a policy they no longer need
- Curious about selling their policy for a lump sum payout
They may have heard from a friend or read online that it’s possible to “cash out” of a life insurance policy, and that’s where the confusion starts. Some assume that reverse life insurance is a formal option, similar to a reverse mortgage, which allows homeowners to convert part of their home equity into cash.
What most people are thinking of is a life settlement. This is a real and regulated financial transaction that allows you to sell part or all of your life insurance policy for a cash payout that you do not have to repay. A life settlement is a transaction where you sell your life insurance policy to a third party for a lump sum. The payout for a life settlement is typically greater than the policy’s cash surrender value but less than the full death benefit. Once the policy is sold, the buyer takes over future premiums and receives the death benefit when you pass away.
To qualify for a life settlement, you typically need to:
- Be over age 65
- Have a whole life, universal life or other permanent policy with a death benefit of at least $100,000
- Have held the policy for at least two years (which varies by state)
- Have changes in your health status since you purchased the policy
Let’s take Judy, a 76-year-old with a $250,000 universal life insurance policy. Her children are grown, she is retired, and the premiums are starting to strain her fixed income. She decides to sell her policy for a $60,000 lump sum payment and rids herself of any future premiums.
This is a much better option than letting the policy lapse or taking the $15,000 surrender value from the insurance company. That’s the power of a life settlement. It turns something you no longer need into cash you can use today.
REVERSE LIFE INSURANCE VS. LIFE SETTLEMENTS: WHAT’S THE DIFFERENCE?
Reverse life insurance and life settlements are often used in the same breath, but they are not the same thing. Think of “reverse life insurance” as a casual term. It’s not a product. It’s more like a search phrase, or a placeholder people use when they are unsure what the real option is. On the other hand, a life settlement is a legitimate, regulated transaction. It involves paperwork, legal review and protections for the seller and buyer.
OTHER TERMS CONFUSED WITH REVERSE LIFE INSURANCE
When people search for ways to get cash from their life insurance, “reverse life insurance” is not the only phrase that causes confusion. There are a few other options that sound similar, but each one works differently:
- Viatical settlement: This is similar to a life settlement but for terminally ill individuals. The payout is often higher, and it is based on the life expectancy of the insured.
- Cash surrender: If you cancel your policy, your insurance company may pay you a surrender value. This amount is usually much lower than what you would get from a life settlement.
- Accelerated death benefit: Some life insurance policies let you access part of the death benefit early if you are diagnosed with a serious illness. This is not a sale, but more like a loan against your coverage.
Each of the options above works in different situations. However, a life settlement usually delivers the highest value when you simply no longer want or need a life insurance policy.