Life settlements have become increasingly popular in the last few years. More and more people are realizing that their life insurance policies may have outlived their usefulness and can be turned into an asset as a part of good financial planning. Are life settlements a good idea for you? To make that decision you first need to understand exactly what it is and the general rules for who benefits most from it.



How Life Settlements Work

A life settlement is simply the selling of your insurance policy to a third party for more than its cash value but less than the death benefit it is worth. The third party takes over the premiums on the policy and will then receive the benefits when you pass away. There are several advantages to selling your life insurance policy this way:

*You will generally get more than the amount you would receive if you simply cashed in your policy for the surrender value with your insurance company.

*You can use the funds you receive in any way you wish and you get it in a lump sum.

*You are relieved of the burden of premiums that may have become too expensive for you.

There are down sides to life settlements to keep in mind as well:

*If you still need life insurance, you may have difficulty finding coverage at a reasonable rate depending on your age and health.

*Your heirs will no longer benefit from the life insurance policy.

*Profits from life settlements aren't tax free.

Obviously, life settlements aren't for everyone. In fact, they don't make financial sense for some people because they don't fall into the categories that appeal to buyers. Who stands to benefit the most from life settlements?

*Individuals over sixty-five.

*Individuals with policies with a face value of at least $200,000.

*Individuals with health problems that are terminal or that will significantly shorten their life expectancy.

*Those who have owned their policy for several years (2 years minimum)

*Those with policies held by highly rated insurance companies.

One of the most common scenarios in financial planning that involves life settlements is of an elderly couple with a limited budget. A sizeable life insurance policy made sense when they had young children at home, but because this is no longer an issue, they may sell one or both policies so that they can invest some of the proceeds and use the rest to pay bills and improve their lifestyle.

Also common is using life settlements for medical reasons. When someone is extremely ill, life insurance may not be as important as the need for money for extensive medical treatments while the person is still living. In fact, in this situation the potential life settlement's is higher because the buyer doesn't anticipate having to pay premiums for years. The immediate cash can take a huge burden off of the family by providing needed funds.

If you are interested in life settlements, talk to a financial planner who is familiar with them. He or she can explain how buyers are found, what the potential of your type of life insurance may be and whether a life settlement is right for you.