Life insurance was always intended as a nest egg for providing for your loved ones after your death. But so-called "life settlements" are growing in popularity. What are they and are they a good deal for you? Ray Hennessey, editor of Smartmoney.com, explains what exactly they are.
Life Settlements are when a company buys your life insurance policy for less than the full amount of the policy. This is a way of getting cash in your hands now. But there are things to consider before you do this.
Shop around for better offers. "Chances are someone is going to approach you and say would you like to sell your life insurance policy," Hennessey says. "Just because they are the first person who calls, doesn't mean you have to take that offer." Also feel free to negotiate for a higher value.
Also, beware of high commissions. "Just like any brokerage transaction, they take a very steep fee out of this," Hennessey warns. "So not only do you not get all the money, but these brokers are making tons of money on this."
And lastly, and most importantly, there is a very big tax consequence on life settlements. "This is like getting a wind fall in income," Hennessey explains. "Say you are getting an extra 50-60 thousand dollars a year, it's going to have a significant tax effect on your income." It's not like you have been paying tax on this money all along. It's treated as if you have just been given a large sum of money.
Hennessey advises "life settlements" are not generally a good idea. Life insurance if best left to your heirs.
by Jenn Eaker
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