Life Insurance Wealth: Maximizing Payouts, Securing Your Future

Life insurance is often taken out to provide financial protection for loved ones after the policyholder's death. However, life insurance can also be used as a tool to build wealth and generate income. Permanent life insurance policies, such as whole life and universal life insurance, offer a savings component that accumulates cash value over time. This cash value can be borrowed against or withdrawn, providing a source of tax-free income during the policyholder's lifetime. Additionally, permanent life insurance policies offer lifetime coverage and tax-deferred growth, making them attractive investment options for high-net-worth individuals. Life insurance can also be used to protect a family's inheritance, cover business ownership, and complement investment strategies. While term life insurance does not offer the same savings component as permanent policies, it can still be used to build wealth across generations by providing a payout to surviving loved ones.

Sell your life insurance policy

Selling your life insurance policy is a big decision, and it's important to understand the process and what it entails. Here's a detailed guide to help you navigate the process and make an informed choice.

Understanding the Process

Selling your life insurance policy is known as a life settlement or a viatical settlement. It involves selling your policy to a third-party buyer, usually a life settlement provider or a broker, in exchange for a cash payout. This option is particularly attractive if you're looking to get more money than the policy's cash surrender value.

Eligibility and Requirements

Not all life insurance policies can be sold. To be eligible for a life settlement, you typically need to meet certain criteria:

• Own a permanent life insurance policy (whole, universal, or variable) with a cash value component.
• Have a policy with a death benefit of at least $50,000 to $100,000.
• Be at least 60 or 70 years old, with a decline in health that increases your eligibility.
• Have owned the policy for a set number of years (usually 2-5 years) as per state regulations.

Steps to Sell Your Policy

If you decide to sell your life insurance policy, here are the steps you can follow:

• Find a reputable and licensed life settlement provider or broker. Research their experience, licensing, and any fees or commissions they charge.
• Meet the qualifying factors and complete a detailed health questionnaire to provide an in-depth overview of your health status.
• Authorize the provider or broker to access your medical records and contact your insurance company on your behalf.
• Share the details of your policy, including the contract and premium illustration.
• Wait for the underwriting process, where the provider evaluates your policy and medical records to determine its value.
• Receive and review the offer. You can choose to accept, reject, or negotiate the offer.
• Complete the closing process, which includes signing the necessary documentation and transferring ownership of the policy to the buyer.
• Receive your payment, which is typically a lump-sum cash payment.

Factors Affecting the Value of Your Policy

Several factors can impact the value of your life insurance policy and the payout you can expect:

• Life expectancy: The longer the insured's life expectancy, the lower the policy's value, as the buyer will need to pay premiums for a longer period.
• Health status: The insured's current health and any changes since the policy was issued can affect the policy's value. Health conditions that reduce life expectancy can increase the value.
• Premium expenses: Higher premium costs can reduce the amount a buyer is willing to pay, as they impact the profitability of the investment.
• Death benefit: The size of the death benefit can influence the payout, as a larger benefit typically results in a larger payout.
• Policy type: Permanent policies with cash value are generally more sought-after and can result in higher payouts.

Tax Considerations

When selling your life insurance policy, it's important to understand the tax implications:

• Life settlements: The portion of the sale amount equal to what you've paid in premiums is usually tax-free. Any amount above your cost basis and the cash value of the policy may be subject to income tax and capital gains tax.
• Viatical settlements: If you qualify for a viatical settlement due to a terminal illness, the money you receive is generally tax-free.

Pros and Cons of Selling Your Policy

Selling your life insurance policy has its advantages and disadvantages:

Pros:

• Immediate cash flow: You receive a lump-sum payment that can be used for various financial needs.
• Relief from premium payments: Selling your policy relieves you from the ongoing financial burden of premium payments.
• Higher value than surrendering: A life settlement typically offers a higher payout compared to simply surrendering your policy.

Cons:

• Loss of death benefit: Your beneficiaries will no longer receive a death benefit, which may be important to you.
• Tax implications: Proceeds from a life settlement may be subject to taxes, reducing the overall value.
• Impact on Medicaid eligibility: The lump-sum payout may affect your eligibility for needs-based programs like Medicaid.
• Health check-ins: The buyer of your policy may have the right to inquire about your health and life expectancy, which some may consider an intrusion.

Tips for Maximizing Your Payout

To get the most value when selling your life insurance policy, consider the following tips:

• Hire an independent advisor to appraise your policy's value and guide you through the process.
• Compare multiple brokers and providers to find the best offer.
• Get your paperwork in order, including medical records and policy details, to streamline the process.

Use it as a retirement vehicle

Life insurance policies, especially universal and whole life insurance, can serve as effective retirement vehicles. Here are some ways to use life insurance as a retirement vehicle:

Policy Loans

You can borrow against your policy's cash value at a lower interest rate than traditional loans. This can be used for various purposes, such as purchasing a car or taking a vacation. Borrowing against your cash value is often a fast and hassle-free method, as the cash value serves as collateral with the insurance company, and there are no credit checks, pay stubs, or approval processes. However, it's important to note that your cash value stops growing if you withdraw it.

Cash Value Growth

By purchasing a policy and allowing the cash value to grow, you can use these funds to supplement your income during retirement. The cash-value account grows over time and can be withdrawn as a source of income in retirement, tax-free if it doesn't exceed the amount you've paid in premiums.

Borrowing from Your Future Self

You can borrow from your cash value, essentially taking a loan from your future self. While you're not required to repay it, it will accrue interest, and the loan amount will be deducted from the death benefit paid out to your family upon your death.

Paying Premiums with Your Policy

If you're a permanent life policyholder, you can use your cash value to pay upcoming policy premiums.

Annuitize Your Policy

Late in life, you can annuitize your policy, allowing it to start paying you a specified amount of income each month over a selected time period, such as 10 or 20 years, life expectancy, or life plus a certain additional period.

While life insurance can be a useful tool for retirement planning, it's important to consider your financial goals, current income, and other factors when deciding how to utilize your policy for retirement.

Provide business protection

Life insurance is a crucial form of protection for businesses, helping to cushion the financial impact of losing a key person. It can also be used as an effective strategy to build wealth.

There are two main types of life insurance: term and permanent. Term life insurance covers the policyholder for a set term and pays out a stated amount, known as a death benefit, if the insured dies within a specified period. Permanent life insurance, on the other hand, does not expire and typically comes in the form of whole life or universal life plans, which combine a death benefit with a savings component.

For business owners, life insurance can be used in several ways to provide protection:

• To keep the business running: Life insurance can be used to pay off business debts, supplement cash flow and cover expenses needed to find a replacement if the owner dies. The cash value component of a life insurance policy can also be tapped into to fuel tax-free business growth while the owner is still alive.
• To fund partnership agreements: Life insurance can help fund a buyout if one partner in a business dies or becomes incapacitated. This is typically stipulated in a partnership agreement.
• To equalize an estate: Life insurance can be used to ensure that all heirs receive an equal inheritance, even if one child works for the family business and the other does not. In this case, insurance can assist in estate planning, allowing the child in the business to inherit the corporation's shares while the other child receives an insurance payout.
• To protect your family: Life insurance can replace lost income and provide financial security for loved ones if the business owner dies unexpectedly, ensuring they can maintain their standard of living.

In addition to providing financial protection for a company in the event of the owner's death, life insurance can also be used to fund a buy-sell agreement. This is a legally binding contract between business owners that dictates what will happen to the business if one of the owners dies, becomes disabled, or wants to sell their interest. There are two main types of buy-sell agreements: cross-purchase and entity purchase. In a cross-purchase agreement, the surviving owners use the death benefit to buy out the deceased owner's interest. In an entity purchase agreement, the business itself uses the death benefit to buy out the deceased owner's interest.

When considering life insurance for business protection, it is important to consult a financial advisor or insurance agent to identify the right type of insurance and coverage amount. Factors such as the size of the business, the number of employees, financial stability, personal financial situation, and the amount of debt should all be taken into account.

Leverage tax benefits

Life insurance can be a useful financial tool for business owners or high-net-worth individuals. Here are some ways to leverage tax benefits to get rich off life insurance:

Estate Preservation

Taking out a life insurance policy can provide a large tax-free lump sum to cover the costs of your estate's tax bill. This ensures that your entire estate is left to your beneficiaries, instead of using a large portion of it to pay taxes. The insurance payout goes directly to your beneficiary, bypassing your estate and avoiding any probate fees.

Estate Equalization

Life insurance can be used to ensure that your beneficiaries receive equal inheritance values. For example, if you have a large home and a vacation property that you want to leave to two of your children, you can take out life insurance so that your third child receives a tax-free lump sum that balances out the values of each inheritance, resulting in a fair distribution of your estate.

Maximizing Your Estate

If you have more income and assets than you need during your retirement, you can reposition excess assets that incur annual taxes and use the proceeds to purchase a life insurance policy. By moving surplus taxable funds into an exempt permanent life insurance policy, you can achieve the following:

• Reduce taxes during your lifetime
• Reduce probate fees on assets left in your will
• Create a larger amount of tax-free money for your beneficiaries
• Maximize the value of your estate

Accessing Tax-Free Cash

Some permanent life insurance policies grow in value on a tax-deferred basis, and as a policyholder, you may be able to withdraw money with minimal or zero tax consequences. The maximum amount you can withdraw is the adjusted cost basis (ACB) of your policy, which is the total amount of premiums paid minus the net cost of insurance. The withdrawn cash is not taxable as long as it does not exceed the policy's ACB.

Business Owner Protection

Life insurance can fund a buy-and-sell agreement in the event of a partner's sudden death. The deceased partner's family receives a payout, while the surviving partners maintain control of the business. A family business can also benefit from a key person insurance policy, which insures the main person in a small business, typically the owner, founder, or key employees. If the key person passes away before a replacement is in place, the business receives a payout to cover expenses such as hiring and training new employees, paying off debts, or covering operating costs.

Borrow against your policy

Borrowing against your life insurance policy is a quick and easy way to get cash. However, this option is only available to permanent life insurance policyholders, such as whole life insurance or universal life insurance. Term life insurance, which is cheaper and more suitable for many, does not have a cash value.

When you borrow against your life insurance policy, you are essentially borrowing from yourself. The cash value of your policy acts as collateral for the loan. This means that you do not need to undergo a credit check, and the loan will not affect your credit score. There is also no approval process or income requirement. The only requirement is that you have sufficient cash value to borrow against, and the minimum amount varies by insurer.

Interest rates on life insurance loans are typically between 5% and 8%, which is much lower than the average rate for personal loans and credit cards. There is also no fixed repayment schedule, and you can pay back the loan whenever you want. However, it is in your best interest to pay back the loan as soon as possible, as the longer the loan is left unpaid, the more interest you will owe.

If you die before repaying the loan, your insurer will deduct the amount owed, including any interest, from the death benefit paid to your beneficiaries. Therefore, it is important to consider the potential impact on your loved ones before borrowing against your life insurance policy.

To borrow against your life insurance policy, you can go directly to your life insurance company for the loan. Alternatively, you may be able to borrow from a bank or private individual, using your policy as collateral, although this option is usually only available to older individuals.

Frequently asked questions