A Note on Life Insurance Buy-Backs

Planning your estate isn't just about having the right will or power of attorney to protect your assets and interests when you pass or if you're unable to take care of yourself if you become incapacitated. It can also include having the right life insurance, or enough coverage, or changing your coverage if your circumstances change. For some life insurance carriers, there is a life insurance buy-back option, which may make sense for some individuals or families.

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What is a Life Insurance Buy-Back Option?

A life insurance buy-back is when someone sells their life insurance policy for a lump sum of cash, rather than continuing the policy. Life insurance payments aren't paid out until after the policyholder dies; however, there may be some reasons that you need to cash out your life insurance, such as an unexpected financial hardship, or a desire to have less coverage, such as after a divorce.

Who Buys Life Insurance Policies?

Life insurance policies, both term life coverage—which only covers you for a certain number of years—and whole life coverage—which covers you for your entire lifetime—can be sold to life settlement companies. These are investors that will continue to pay the premiums on your policy and receive the benefits of the policy once you pass. Many investors see these policies as a good return of other money. Plus, the insurance company doesn't care who the beneficiary is, as long as the premiums are paid on time.

When Would This Option Be Recommended?

There may be many reasons for someone to sell their life insurance policy, but it ultimately comes down to finances. For example, you may be trying to cut down on monthly expenses, and eliminating the monthly life insurance payment can help. Or, you may have enough in your savings account and retirement funds that you don't need to have the life insurance policy to provide for your family. In this case, called "self-insurance," you may be better served by eliminating the policy and having the cash to invest in other things.

It's important to note that if you do sell your life insurance policy, you may have a harder time obtaining another policy if your needs change. Finally, consider the needs of any loved ones who may be affected by your passing. While it may be tempting to cash out your life insurance with the buy-back option, any dependent children you may have might benefit from a policy that will protect them financially once you’re gone.

Professional Estate Planning That Works For You

The team at ClearEstate can help you with your estate planning process, from drafting wills, trusts, or living wills to determining the right amount of life insurance to carry, or selling it to an investor, if that works for your situation. Give us a call today for a consultation, and make sure that your assets and preferences are clearly stated, in the event you can't advocate for yourself.