A life settlement is when a third party buys your life insurance policy. The payment for the life settlement is often more than the cash surrender value of the policy but less than the death benefit. It’s a good idea only if you would otherwise be surrendering the life insurance policy or would allow it to lapse, say in the event of financial crisis, but come with significant drawbacks you need to be aware of.
I titled his post “avoid life settlements” because it’s something you should avoid if you experiencing some financial difficulty. If you’ve done the legwork and are sure that selling your life insurance policy is the right decision, by all means go forward with it. It’s not a raw deal in all cases but there are a lot of considerations you need to keep in mind.
First, there are high transaction costs involved in this type of exchange. Second, there are unintended consequences such as being unable to buy a new policy or the loss of state and federal benefits like Medicaid. Finally, you’ll have to pay income taxes on the sale.
As with any major financial decision, you’ll want to check with a financial adviser before doing anything.