A Life Settlement can be very attractive way to tap into an asset that you own. However it is important to be aware of alternatives – we’ve compiled a short list of these alternatives in this chapter.
Consider them carefully before moving forward.
Accelerated Death Benefit
Your life insurance policy may offer an Accelerated Death Benefit (ADB). Also known as “Living Benefit”, this allows you to receive a portion of your death benefit from your insurance company. However, your insurer may have certain requirements for you to qualify – such as having to be terminally ill which usually implies a life expectancy that is less than two years.
Also note that you can’t stop paying your premiums even after receiving your ADB. You are still required to make your policy’s monthly payments while you receive portions of your benefits which will be considered as a loan you won’t have to repay. Accelerated Death Benefits will be deducted by the insurance company from your policy’s face value when you pass away.
Like a life settlement or an Accidental Death Benefit, it is meant for policy holders that are terminally ill – but unlike Accidental Death Benefit, you can receive a lump sum settlement upon the sale of your life insurance policy to a third party. And therefore you are no longer required to pay the monthly premiums. The buyer of your policy will take these payments.
Policy Cash Value / Death Benefit Loan
If you are a whole-life policyholder, you may tap into the cash value has built up in your policy over time. You can either borrow against your policy’s cash value or use it as collateral for secured loans. Borrowing against your policy’s cash value is called a Death Benefit Loan. When the death benefit becomes due, the loan amount, its interests and other fees will be subtracted from the full death benefits. Note however that you cannot take out as a loan more than the cash value of your policy, which is typically a small fraction of your benefit.
Policy Surrender Value
If you no intention of owning your policy any longer, you can cash it out based on for its surrender value. This amount is usually significantly lower than a life settlement.
Remember not to treat your life insurance policy as a long-term commitment that you need to pay rather than an investment that has the growth potential like any other property you invest in. Your policy is an investment, a convertible asset, and can be a significant part of your net worth.