Unemployment remains high and the housing market is still in the doldrums. Although the stock market improved in late 2011 and early 2012, it remains volatile.
So it’s no wonder some investors are considering selling their life insurance policies for cash.
But is it a good idea?
Selling your policy
First, let’s review how one sells a life insurance policy.
Selling a life insurance policy is referred to as a life settlement transaction. Under such a transaction, someone buys your life insurance policy for a lump sum. The new owner of the policy continues paying your premiums until you die, at which point the new owner collects your death benefit.
This can provide immediate income, which may be beneficial in difficult times. But taking cash in exchange for your life insurance policy may not make as much sense as it used to, thanks to two factors.
First, there has been a steep decline in the price life settlement investors are prepared to pay for life insurance policies, so you might not get as much cash as you had hoped for your policy.
Second, thanks to a 2009 Internal Revenue Service ruling that raised the tax bill for many individuals who sell their life insurance policies, you may end up being heavily taxed.
These two factors point to the fact that the current life settlement market favors buyers.
If you’re interested in selling your life-insurance policy and are concerned about whether it’s the right approach for you, why not consult a financial advisor? He or she can help you determine if there are better options than selling your policy.
For example, if it’s cash you need, you may be able to withdraw or borrow funds from your life insurance policy. You also may be able to make premiums more manageable by restructuring the coverage.