When times are tough people often look to the cash value in their life insurance policies as a source of cash. In addition to borrowing the cash value, one strategy that is sometimes recommended is to sell your life insurance policy to a third party. You would get more than the cash value but not as much as the death benefit. Although this might seem like a good way to raise cash, in general this is a strategy that financial planners don’t recommend.
Selling your life insurance to a third party is called a “life settlement.” There are several things to be aware of before jumping into such an arrangement. First of all, in general, the value of the settlement over the amount of your total premiums paid will be taxable as ordinary income. You would owe federal and state tax. That increase in taxable income may affect your eligibility for Medicaid or other government assistance. In addition, you lose a valuable asset that may be very important to your spouse or other beneficiaries at your death.
Investors who buy life settlements are really only interested in policies for individuals over age 65 and in poor health, and this group is particularly vulnerable to aggressive sales tactics. The industry is susceptible to fraud because the expenses of the sale can be high and not readily discernable.
As I said above, an alternative to selling your policy is to take a loan on the cash value. If you don't need the cash value but are having trouble keeping up with the premiums, ask your adult children, if they are the policy beneficiaries, to pay the premiums.
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