I started Insurance Blog by Chris™ because I have a passion for insurance. Here at the blog, our job is to educate and inform people about the best insurance for them. Since then, we have grown into national brands with a large team of researchers helping people understand all forms of insurance.

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Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health insu...

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Reviewed by Rachael Brennan
Licensed Insurance Agent

UPDATED: Nov 9, 2020

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Life insurance is far more flexible than many people realize.

… So whether you can no longer afford your policy, or are looking for options your beneficiaries will have upon your death, we’ve got you covered in this article with everything you need to know about life insurance settlement options.

There are 2 types of life insurance settlements that you can consider, they include:

  1. Life Insurance Settlement Options While Still Alive
  2. Life Insurance Settlement Options for When You Die

Life Insurance Settlement Options While Still Alive

We’ll cover this one first because many people don’t know that if they have a permanent life insurance policy there are several ways to derive income from your life insurance policy while still alive.

These fall into 2 categories known as:

  1. Dividend Options
  2. Non-Forfeiture Options

RELATED: 5 Critical Tips You Must Know Before Buying Life Insurance

Life Insurance Dividend Options

The first thing to take note of is that this only applies to a participating permanent life insurance policy where you receive dividends. Some permanent policies are non-participating and do not apply for this particular option.

The dividends which you can receive are a guarantee, individual to each insurer and market conditions and relative to the premium you pay.

The one good thing about dividend returns from these types of policies is that any money you receive is not taxable which is unlike most other investment vehicles.

Dividends earned from a participating life insurance policy are not taxable by the IRS. Participating policy dividends are not taxable as income because they are not dividends in the traditional sense. While they do represent a portion of the insurance company’s profit, that profit was made from you. In essence, the IRS treats them as though they are refunds for overpayment of premium. Frank Addessi, The Simple Dollar 

Your life insurance dividend options can be taken in the following ways:

Receive Cash – Generally payable annually in the form of a check on the anniversary date of the policy
Use Towards Premiums – Instead of taking the dividends as cash, you can apply the money towards your policy premiums
Let Dividends Accumulate – Means that you accumulate your dividends as interest and can withdraw anytime but will be required to pay taxes on any interest accrued
Buy Paid-Up Options – Means that you can use the dividends to buy additional life insurance of the kind you already have in place
Buy Additional Insurance – You can use the dividends to buy a 1-year term life insurance policy which would be provided as a separate rider

Non-Forfeiture Life Insurance Options

This includes various methods you can use to obtain the cash value in the following 2 situations including:

Cease Paying Premiums – such as when you no longer want to pay premiums and the policy is either going to lapse or be surrendered.
Life Settlement – means when you sell your life insurance policy to a third party

Let’s look at each separately.

Life Insurance Settlement to Cease Paying Premiums

You have 3 options (applies to Permanent Life Insurance policies only) to choose from when you want a life insurance settlement when you want to stop paying the premiums including:

  • Cash Surrender – You can opt to receive any outstanding cash value when you choose to surrender the policy
  • Reduce Your Paid–Up Option – Means that you can use the cash value you have accumulated to buy a single-premium policy (applies to Whole Life) but for a lesser amount than the policy you originally purchased
  • Extended Term Option – Means you use the cash value to buy a Term life insurance policy equal to your permanent policy’s original value, but the coverage only lasts to the length of the term

RELATED: Check Sample Life Insurance Rates by Age (No Personal Info Required)

Life Settlement Options

A life insurance life settlement option simply means that you sell your life insurance to a third party.

This approach is especially popular with seniors these days and there are 2 approaches you can take including:

  • Selling your policy to a family member
  • Selling your policy to a Life Settlement Broker
  • Selling your policy to a Life Settlement Company
  • Sell on your policy on your own

However, before you do so you would be wise to seek some financial advice because there are a number of pitfalls that can occur so you should be aware of the following:

  • Most sellers only receive as little as between 13 – 21% of the value of the policy
  • All policies apply including term insurance
  • Brokers and other purchasers take a commission as high as around 9% to as high as 30%
  • Most brokers will only consider people who are over the age 65 or will only consider those with a chronic or terminal illness and have policies worth at least $100,000
  • Selling your policy can have tax implications
  • Selling your policy may affect your ability to qualify for government-sponsored programs
  • You lose control of your death benefits
  • The buyer has access to all your medical reports including current ones

So, be very cautious about taking this approach as it might be more advantageous to simply surrender the policy and take the cash value of the policy instead (Applies to permanent life insurance policies only as term policies have no cash value when surrendered).

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Life Insurance Settlement Options When You Die

Choosing a life insurance settlement option for when you die should be approached and considered carefully. It all depends on what you want to achieve and how you want to provide for your family.

Let’s look at the various settlement options available.

Life Insurance Policy Pay-Out Options

Your choices include either:

  • Lump-Sum Option
  • Income or Annuity

Lump-Sum Option

Many people simply opt for the lump sum option where the entire amount of life insurance proceeds is fully paid out all at once. Using this approach can be ideal if you want your beneficiaries to have a large amount of cash on hand to manage estate taxes.

This option can also be ideal if it’s for business purposes if you own your own business or in the case of a key man or buy-sell agreement life insurance policies. This option might not be the best if you want to provide ongoing income to your family over a longer period of time.

Income or Annuity Life Insurance Options

First off, annuity life insurance options only apply to permanent life insurance policies and should be discussed with your financial advisor or life insurance agent beforehand.

However, you can opt for any of the following choices and for all types of policies including term policies. Your choices to have your proceeds paid out can include:

  • Income for Certain Periods Option – you can define the length of time that you want the proceeds paid out such as over 10, 15 or 20 years for example.
  • Fixed Period Income Option – The proceeds are paid over a set period of time such as 15 years and can be paid annually, twice a year, quarterly or monthly. Generally, by doing so the beneficiary would receive more money overall than if they had received a lump sum because of the accrued interest.
  • Joint and Last Survivor Income Option – If 2 life partners have been named as beneficiaries, then both would receive the income which would continue if one of them dies and would cease when both have died.
  • Interest Income Option – In this scenario, the proceeds would stay with the life insurance company and the beneficiary would receive the interest which could be paid either annually or monthly. The beneficiary can opt to take the entire amount of the proceeds at any time they choose.
  • Fixed Amount Income Option – This means that the beneficiary would receive a fixed dollar amount such as $1,500 per month until all the proceeds are used up. Again, the beneficiary would receive more money this way than if they had received a lump sum.

How to Choose Your Life Insurance Settlement Options

The best way to fully understand all the ways you can use your life insurance proceeds is to talk to a financial adviser along with your knowledgeable life insurance agents.

To learn more about life insurance settlement options, then call us right now at 888-603-2876 so we can answer all your questions!