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Five benefits of converting life insurance to cash

by Maryalene LaPonsie

Thinking about converting a life insurance policy to cash? Here are five benefits for selling a life insurance policy as well as important considerations to think about before you make a decision.

Countless seniors may have thousands of dollars tucked away in their filing cabinet at home and not realize it. Life insurance policies offer more than simply a death benefit for heirs. They can also provide an immediate source of income via accelerated death benefits, viatical settlements and life settlements.

5 benefits of converting life insurance policies

For seniors living on a fixed income, an emergency or illness can mean the difference between a comfortable retirement and living under a pile of debt. Converting life insurance to cash is one way to provide a financial cushion that can absorb unexpected or large expenses. In addition, some seniors may find that a life settlement provides them extra income to travel or enjoy life's other little luxuries.

Some benefits of converting a life insurance policy to cash include the following:

  1. Money for long term care: With the cost of nursing home care exceeding $90,000 a year, long term care can cripple a family's finances. Unless an individual has a long term care insurance policy, there are relatively few public resources available to pay for assisted living. Converting a life insurance policy to cash can help ease the financial strain of long term care.
  2. No more premiums: Seniors selling their life insurance policies through viatical and life settlements don't just receive a lump sum payout, they stop making monthly premium payments. Eliminating this expense can provide breathing room in an otherwise tight budget.
  3. Opportunity to provide an early inheritance: Some seniors may want to help their families while they are still living. Cashing in a life insurance policy can provide the opportunity to give beneficiaries an early inheritance. A viatical or life settlement can also be used to make a charitable donation.
  4. Pay off debt: No one wants to enter retirement saddled with huge consumer debt. Cash from a life insurance policy can be used to eliminate debt as well as pay for lingering bills and home repair needs.
  5. A more comfortable retirement: In some cases, the immediate need for life insurance has passed. The children are grown, and the funeral is prepaid. Rather than leaving money locked in a life insurance policy, seniors in these situations may chose to convert the plan to cash. That money can then be used for travel, hobbies or an improved standard of living.

Converting a life insurance policy: important considerations

If converting your life insurance policy to cash seems like a good idea, take the time to meet with a financial professional to discuss the process. While viatical settlements are tax-free under federal law, money received from life settlements can be taxable.

In addition, be sure you fully understand all the costs involved in the sale of a life insurance policy. Since sale prices for viatical settlements can vary, you may want to obtain several quotes to ensure the sale price you accept is competitive. It is also prudent to check with your state's insurance commissioner and Attorney General's office to confirm the company to which you will be selling is licensed and legitimate.

Life insurance can be a source of income for cash-strapped seniors. However, before making a final decision, carefully review the transaction, discuss the matter with your beneficiaries and understand how a sale might affect your future insurability.