Understanding Life Insurance
Life Insurance Basics | Who Needs Life Insurance? | Types of Life Insurance | Individual vs. Group Policies | Modifying your Coverage | Settlement Options | Know Your Rights | Buying Life Insurance | Shopping Smart for Life Insurance | Financial Implications of Owning Life Insurance | Replacing Your Policy with a New One | Viatical and Life Settlements | Annuities | For More Information or Assistance
Life insurance helps protect your family financially by replacing some or all of your income after you die. Life insurance may not be right for everyone. Consider your age, marital status, and who depends on you for support to decide if buying life insurance is a good choice for you.
Before you buy any type of insurance, make sure the agent and company are licensed to sell insurance. To learn whether an agent or company is licensed, call the Texas Department of Insurance Consumer Help Line. You may also view agent and company information using the Check Agents or Check Companies features on the TDI website
463-6515 in Austin
People buy life insurance to ensure that their beneficiaries have enough money to maintain their standard of living after the policyholder dies. Beneficiaries are the people you designate to get money, called a death benefit, after you die.
You may designate one or more beneficiaries. If you designate more than one, you must decide how to divide the money. You may also choose a secondary beneficiary to receive the money if the primary beneficiary dies before you.
Life insurance isn’t an investment. An investment is a financial risk – you might make money, but you also might lose some or all of your investment. In contrast, life insurance pays a guaranteed death benefit.
Some types of life insurance can build up cash that you can use for retirement income. Agents and companies may not refer to life insurance as an investment or retirement income source, however. If an agent or company tries to sell you a life insurance policy as a good investment, be wary. Also, don’t confuse life insurance with annuities. People often buy annuities for retirement because they can provide steady income over a long period.
Insurance companies use a process called underwriting to decide whether to sell life insurance to someone and how much to charge them. The company will consider several factors, including your age, gender, medical condition, and whether you smoke. Younger applicants who are in good health and who don’t smoke will be charged lower premiums because the company expects that these policyholders will live longer and be able to make more premium payments. Older applicants, applicants with health problems, and applicants who smoke will probably pay more because they have a shorter life expectancy.
Companies might decide not to sell you a policy because you are too much of a risk. If a company won’t sell you a policy or charges you more because of your health, keep shopping. Underwriting guidelines vary by company. You might be able to find coverage with another company.
If no one depends on you financially, you probably don’t need life insurance. If you have people who rely on you, you probably want to have at least enough insurance for your family to pay your debts after you die, including rent or mortgage and bills. Consider your circumstances and the quality of life you want your dependents to have when deciding whether to buy life insurance and how much to buy.
The following guidelines can help you decide if life insurance is right for you:
- Parents should consider life insurance because their children depend on their incomes. A parent’s need for life insurance usually lessens as children get older. Couples should consider insuring both parents, even if only one has a job. This will help the surviving parent pay for child care.
- Young couples who plan to start a family should consider buying life insurance because it usually costs less when you’re young.
- Older people whose children are grown and independent are less likely to need life insurance because no one is depending on them for money. Savings can lessen a family’s need for life insurance as wage earners near retirement age.
- Single adults typically don’t need life insurance, unless they are single parents or support someone such as an elderly parent.
- Working couples without children or other dependents typically don’t need life insurance if the survivor earns enough to pay bills without using all of the couple’s savings. Life insurance is a good idea if only one spouse works because the nonworking spouse could maintain his or her standard of living if the working spouse dies.
Buying Life Insurance for You or Someone Else
You may buy a life insurance policy for yourself or for anyone who gives you permission and agrees to the company’s underwriting process. The person who buys the policy is the policyholder and is responsible for paying the premiums.
People usually buy life insurance for themselves to provide money for a spouse, dependent child, or other family member. In some cases, you might want to buy a life insurance policy on someone else and name yourself as the beneficiary. For instance, if you are divorced and get child support, you might want to buy a life insurance policy on your former spouse.
Creditors also buy life insurance policies on people they loan money to. The policy’s death benefit would pay the balance of the loan if the recipient dies before repayment. Businesses sometimes buy policies to cover the lives of employees who are important to the company’s operations.
There are three types of life insurance: term life, cash value life, or a combination of the two.
Term Life Insurance
Term life policies are typically cheaper and less complicated than cash value life policies.
Term life coverage lasts for a specific period of time – such as one, five, 15, or 20 years – or until you reach a certain age. The cost of term life gets higher as you get older. For people under age 40, term life pays the largest death benefit per premium dollar.
Term life policies usually don’t include a savings component. If you die during the term, the insurance company pays the death benefit. If you don’t die during the term, the policy ends, and you don’t receive a death benefit. If you still want life insurance, you must either renew the policy or buy another type of coverage.
Term life can be a good choice for young families with children. You might only need coverage until your children are old enough to provide for themselves.
Term Life Features
The two most common features of most term life policies are convertibility and renewability.
Convertibility means you can exchange the policy for permanent life insurance of equal value without taking a medical exam or going through underwriting. For example, you could transfer a $100,000 convertible term policy into a $100,000 cash value policy without having to answer questions about your health or medical history.
Converting a policy will increase your premium because cash value coverage usually costs more than term life. Convertibility can be an important feature if your health worsens and you can’t qualify for a permanent policy. Converting a term life policy to a cash value policy can also allow you to use your policy to build savings.
Companies usually only allow policyholders to convert term life policies before they turn 65.
Renewability means you may extend the policy for additional terms, regardless of your health and without having to pass a medical exam. This can be another advantage of term life coverage as you get older or if you become ill. Even if you no longer meet a company’s underwriting criteria, the company must still renew your policy.
Terms can renew every one, five, 10, or 20 years. Premiums generally go up at each renewal term. Annually renewable premiums can be extremely high for people past middle age. If you’re paying high annually renewable premiums, you might want to consider another type of coverage.
Term Life Payouts
Term life insurance is typically paid out in one of three ways:
- Level term coverage pays a death benefit that remains the same over the term. For example, a 20-year level term policy with a $100,000 death benefit will always pay $100,000, whether the insured dies in the fifth or 15th year. Depending on the policy, your premium for level term coverage will either remain the same or increase at a scheduled rate.
- Decreasing term coverage pays a death benefit that decreases over the term at a scheduled rate. For example, a 20-year decreasing term policy may begin with a $100,000 death benefit that decreases by $5,000 per year. If you die in the 11th year, the policy pays $50,000. Decreasing term coverage can be a good option for parents since a child’s need for financial support typically decreases as the child gets older. A disadvantage of decreasing term coverage is that its convertibility value also decreases each year. Premiums typically remain about the same over the term.
- Increasing term coverage pays a death benefit that increases over the term at a scheduled rate, which is often linked to inflation. For example, a 20-year increasing term policy may begin with a $100,000 death benefit that increases by 5 percent of the face value per year. If you die in the 12th year, the policy would pay about $155,000. Premiums typically increase each year relative to the benefit increase.
Cash Value Life Insurance
Cash value life policies usually cost more because they have more features and benefits. The main feature of all cash value life insurance is a savings component that grows over time and may be withdrawn, invested, or borrowed against during your lifetime.
Your initial premiums for cash value insurance are typically higher than for term life insurance because you’re also purchasing the savings feature. Cash value premiums generally increase at a slower rate.
If you buy a cash value policy at a young age and continue the policy into middle age, your premium will likely be lower than a term life policy with a similar death benefit.
A portion of each cash value premium is placed into an account that grows over time. This is the policy’s cash value. The amount may grow at a fixed interest rate, be tied to indexed interest rates, or increase if the stocks, bonds, or other securities used as investments increase.
A policy might allow you to withdraw from the cash value, use it as collateral for a loan, or use it to make future premium payments. If you withdraw all of the cash value, the company will cancel the policy and the coverage will end.
When you die, beneficiaries may receive the policy’s death benefit or the benefit plus any remaining cash value. Premiums will be higher for the second option.
It takes at least three to five years for a policy to build a high cash value. If you withdraw some or all of the money before a certain time, you will probably have a high surrender charge. You might also be liable for income taxes on the money.
It is a good idea to keep a cash value policy for at least 15 to 20 years. About half of the people who buy these policies cash them in within five years, which is usually a bad idea financially.
Types of Cash Value Policies
The two most common variations of cash value insurance are whole-life insurance and flexible premium universal life insurance.
Whole-life insurance remains effective your entire life unless you cash the policy in or stop paying premiums. You never have to renew.
Premiums either remain about the same or increase at a scheduled rate. The premium is used to pay for the death benefit, to pay the company’s overhead costs and profit, and to increase the cash value.
Some whole-life policies are participating. This means they might also pay policyholders. The payments, called dividends, depend on the performance of the cash value investment account. Typically, you can choose whether to get the dividend in cash, add it to your policy’s cash value to purchase additional death benefits, or use it to pay future premiums.
Dividends are not guaranteed. Some policies don’t pay dividends at the company’s projected rate and others might be higher than the projection. Ask for the company’s history of projected dividends versus dividends actually paid before buying a policy.
Flexible premium universal life insurance allows you to choose the amount of coverage, the premium you pay, and the cash value you build. As long as you pay your premiums and the monthly deductions don’t drain the cash value, the policy will remain in force until the maturity date. At the maturity date, coverage ends and you receive the cash value.
Some flexible premium policies pay a guaranteed rate of return. Others are variable universal life policies whose value depends on the performance of stocks, bonds, or other investments. For this reason, agents who sell variable life insurance in Texas must have a federal securities license in addition to the standard state insurance license. The rules and policy terms for flexible premium policies are complicated. Talk to a financial or estate planning adviser to make sure you understand a policy before you buy it.
A flexible premium policy will allow you to change the amount you pay for the premium, the death benefit, or the cash value at any time. Any adjustment you make will affect one or both of the other areas. For example, increasing your premium will increase either your cash value, death benefit, or both.
Many flexible premium policies give you the option to lower your premium payments below the amount needed to pay the company’s overhead expenses. The company will then deduct that amount from your cash value. Be careful with this option. If the cash value reaches zero, you will have to start paying the full amount of the premium or the policy will lapse. The company must send you an annual report with your cash value amount and notify you if you’re ever in danger of losing your policy because you don’t have enough cash value.
Most flexible premium policies have a secondary guarantee, or a no-lapse premium benefit. A primary guarantee is the premium payment necessary to cover the monthly deduction. If the primary guarantee isn’t enough, a secondary guarantee keeps the policy from lapsing.
Comparing the Major Types of Life Insurance
|Term Life||Cash Value Life|
|Whole Life||Universal Life|
|Premium||Lower initially. Increases with each renewal.||Higher initially than term life. Normally doesn’t increase.||Flexible premiums.|
|Protects you for…||A specified period.||Your entire life if you keep the policy.||A flexible time period.|
|Policy Benefits||Death benefits only.||Death benefits and eventually a cash and loan value.||Flexible death benefits and eventually cash and loan value.|
|Advantages||Ability to buy more coverage for a lower premium. You could consider developing an outside investment program.||Helps with financial discipline. Generally fixed premium amount. Cash value accumulation. You can take a loan against the policy.||More flexibility. Takes advantage of current interest rates. Offers the possibility of improved mortality rates (increased life expectancy because of advancements in medicine, which may lower policy costs).|
|Disadvantages||Premium increases with age. No cash value.||Expensive if you surrender early. Usually no cash value for at least three to five years. May not meet short-term needs.||Same as whole life. You also have greater risks due to program flexibility. Low interest rates can affect cash value and premiums.|
|May be renewable or convertible to a whole life policy.||May pay dividends. May provide a reduced paid-up policy. Partial cash surrenders permitted.||May pay dividends. Minimum death benefit. Partial cash surrenders permitted.|
Other Types of Life Insurance
The following types of life insurance provide only certain types of coverage or are sold in unique circumstances:
Credit life is a type of policy that lenders buy to pay the balance of a loan in case the borrower dies before repayment. A bank or lender might require you to buy a credit life policy as a condition of a loan.
If you already have a life insurance policy, you might not need credit life. You might instead agree to assign some of the death benefits to the lender to repay the loan balance.
Credit accident and health coverage pays the balance of the loan if you get sick or injured and can’t repay the loan. A creditor who requires this type of coverage will usually add the cost of the premium to your loan payments.
You might have to go through underwriting for credit life insurance. Texas law prohibits lenders from requiring that you buy credit life or credit accident and health insurance for some types of loans. Here are some restrictions:
- A lender may not require credit life or credit accident and health coverage as a condition of any home loan. Instead, the lender may require you to buy a mortgage guaranty policy, a type of coverage that protects a lender from default under more general circumstances.
- A lender may not require you to buy credit life and credit accident and health coverage for any loan of more than 10 years.
- A lender may not charge a loan recipient more than the amount of the company’s premium for the coverage or otherwise profit by requiring the coverage.
- A lender may not require you to buy coverage from a specific company.
Prepaid funeral insurance is a special type of policy to pay for funeral services in advance. An advantage of this insurance is that it locks in the funeral cost at current prices.
Funeral insurance can be expensive compared to other types of life insurance. The premium amount often exceeds the amount of the death benefit within a few years. At the same time, many policies won’t pay the full amount of funeral expenses if you die before paying a required amount.
A standard life insurance policy or savings may be a better way to pay funeral costs. You should shop carefully before you buy funeral insurance and make sure you understand a policy’s details.
Home service life is a type of insurance that is sold door to door. Some companies call these policies industrial life insurance. Be careful with these policies. Some home service life policies can be a good deal, but many offer low death benefits, build cash value at a low rate, and have high premiums.
Individual life insures one or more people in a single policy. This type of coverage gives you the most choice because you’re free to shop among companies to find the policy that best meets your needs. Many companies sell individual policies with only the features you need.
Individual policies usually have strict underwriting guidelines because the company’s risk is based on one person. Younger people in good health usually pay less for coverage than those who are older or who have high risk factors. A company might not want to sell a policy to someone who is considered a high risk.
Group life insures a group of people under a single contract. State and federal laws restrict the companies’ underwriting criteria for group policies. If you don’t qualify for an individual policy because of age or health reasons, group life coverage might be a good option.
Group policies are most commonly offered through employers or other organizations, such as professional organizations, churches, and fraternal groups. Any organization that sponsors a group life policy must make it available to all members of the group regardless of age or health status. It is against the law to require group members to buy a policy as a condition of membership. Group life insurance may be sold as term life, whole life, or universal life coverage.
Policy riders and endorsements are additional policy benefits that you might be able to add to a policy to expand the coverage, usually for an additional premium. Some of the most common endorsements are:
- Additional term insurance adds term life coverage to a whole life or universal life policy. For instance, if you need $500,000 worth of total coverage, you could purchase a $100,000 cash value policy with a $400,000 additional term insurance rider. As you make more money, you could convert some or all of the term rider into the main cash value policy. This is the same way that most stand-alone term life policies are convertible to cash value insurance.
- Guaranteed insurability ensures that you will be able to buy additional coverage from the company in the future, regardless of your age or health condition. These factors may still be used to determine your premium rate. You usually must buy the additional coverage by a specified date or life event, such as retirement or reaching age 65.
- Accidental death provides for an increased death benefit – typically double the value – if you die as the result of an accident. Certain restrictions might apply.
- Disability waiver of premium allows you to stop paying premiums if you meet the policy’s definition of disabled. This lasts as long as you have the disability. This rider is typically only available to people under age 60.
- Accelerated death benefit option prepays some or all of the death benefit while you are still living if you are diagnosed with a terminal illness, specified disease, or a long-term care illness. People often buy this rider to help pay for end-stage care. The rider typically requires a doctor to confirm that you are unable to perform certain activities of daily living.
- Spousal rider provides term insurance coverage for your spouse. Essentially, this rider combines two policies into one.
- Children’s rider provides term insurance for your children. Most companies require the child to be at least 14 days old, and coverage typically lasts until the child turns 21 or 25.
Companies usually pay the death benefit as a single lump sum, but there are other settlement options. Either you or your beneficiary chooses how the death benefit will be paid. Common settlement options include:
- Interest option. The amount of the death benefit remains with the insurance company, and the company pays the interest to the beneficiary on a regular basis. The company will allow you to withdraw the principal under certain conditions.
- Fixed period. The company pays the death benefit at regular intervals, with interest, over a chosen period of time.
- Life refund. The insurance company pays a set monthly amount to the beneficiary for the remainder of his or her lifetime. Under this option, it’s possible for the beneficiary to receive more than the policy’s stated death benefit if he or she lives longer than expected.
- Joint and survivor. The company pays death benefits for two lives, rather than one. Joint and survivor settlement is a common option for married couples and business partners. When the first person dies, the surviving person receives a death benefit. When the second spouse dies, the beneficiary receives a death benefit. The amount of a joint and survivor payment is determined by the age and health factors of both spouses or partners.
Prompt Payment of Death Benefits
Insurance companies must acknowledge your life insurance claim within 15 days and either pay it within 45 days or explain why the payment is delayed. For an individual life policy, the company must also pay interest on a death benefit from the time the company receives the proof of loss statement to the time the company pays the death benefit.
Missing a Premium Payment
Most policies have a 31-day grace period after your premium’s due date during which you may pay with no interest charged. If you die during this period, your beneficiary receives the death benefit minus the premium owed.
If Your Policy Lapses
To reinstate a lapsed policy, you must pay some or all of the overdue premium with interest and repay or reinstate any loans obtained using the policy as collateral. Most companies will reinstate a policy within a five-year period, but may require you to answer additional health questions or take another medical exam.
When you apply to buy a life insurance policy, the company will consider your risk factors. The company then decides whether to sell you a policy and what rates to charge you. This evaluation is called underwriting. You can expect to fill out a health questionnaire. If you are applying for a policy with more than $100,000 in coverage, you might also have to provide medical records and take a physical exam.
It’s important that you give full and accurate information on your application. Life insurance policies have a two-year contestable period. If you die within this period, the company may investigate the cause of death and look at the information you wrote on the application. If the company learns that you withheld information that might have affected its decision to issue coverage – even if the information is unrelated to the actual cause of death – the company may deny payment of the death benefit. If a company denies payment, it must refund the premiums you paid into the policy.
By law, the contestable period may not exceed two years. If you die for any reason after this period, the company must pay the death benefit. The company may not use information you disclosed truthfully to deny payment. Never allow someone else – including an agent – to fill in personal information on your application or to sign it on your behalf.
Almost all life insurance policies have a suicide clause. The company will not pay the death benefit and will return the premiums paid if you commit suicide during the first two policy years.
Choosing the Right Amount of Life Insurance
There is no formula to decide how much life insurance you need. Some consumer groups recommend buying five times your annual household income, while others recommend 10 times your income.
To decide the amount that’s right for you, think about your family’s current and future financial needs and how long your beneficiaries might need money. It’s also important to consider the value of services provided by nonwage earners. For example, a stay-at-home parent’s child care and household management should be included.
- Get quotes from several companies. Each insurance company uses its own underwriting guidelines. One company might sell you a policy at a much lower premium than another.
- Life insurance agents are captive, meaning they can only sell policies for the insurance company they work for.
- Brokers are noncaptive, independent contractors who can sell policies for multiple companies. A broker should be able to give you price quotes from several companies during a single phone call or visit.
- Compare “apples to apples.” Be sure the policies you compare offer similar levels of coverage. The more features, options, and benefits a policy has, the more it will cost. A less expensive policy could have fewer features or a lower death benefit. A more expensive policy might be a better value when you consider the amount of the death benefit per premium dollar charged. Don’t choose a policy based on price alone.
- Buy the policy that’s right for you. The more a policy costs, the more an agent or broker typically earns as a commission. The policy that’s best for your agent or broker might not be the best for you.
- Make sure your company and agent are licensed. It is illegal for an agent or company to sell insurance in Texas without a state license. The Life, Accident, Health, and Hospital Insurance Service Guaranty Association pays some or all of most claims for Texas-licensed companies that go bankrupt or become insolvent. If your company is unlicensed and goes bankrupt, your beneficiary might not get the death benefit. You can learn whether a company is licensed by calling TDI’s Consumer Help Line at 1-800-252-3439 or by using the Check Companies feature on our website.
- Research your company. An insurance company’s financial strength and complaint record can tell you a lot about the quality of service it provides. You can learn a company’s financial rating and the number of complaints against it by calling the Consumer Help Line or using our website.
- Shop for a low-load policy. You can save money, particularly on cash value life insurance, if you buy a policy with low commissions and administrative fees, collectively known as the load. Financial planners who are licensed insurance counselors often sell these policies. Generally, financial planners charge clients a flat service fee. Since low load policies have fewer initial fees, you will also lose less money if you cash out early.
- Use your free-look period. Most Texas policies will provide you a free look period of at least 10 days. During this time you may cancel the policy for any reason and get a full refund. Use this time to read your policy carefully to be sure the coverage is right for you.
Here are some additional tips to help you shop for life insurance:
- Agents often use charts to show how a policy’s cash value might grow. Confirm that the chart shows a cash value that is guaranteed by the insurance company, and not a financial projection. Projections are based on assumptions and you shouldn’t rely on them as a promise of policy’s performance. You might earn much less than the projection. Ask your agent for a history of a company’s projections versus the actual growth of cash values. The agent shouldn’t object.
- Be careful if an agent tells you that interest or dividends earned on your policy will cause your premiums to disappear during the life of the policy. If interest rates or dividends drop, you may have to pay higher premiums or pay longer than you expected.
- Some agents also sell retirement investments and student loans. The law prohibits agents from offering discounts on an investment or loan, or offering any type of gift, to encourage you to buy life insurance. If you believe an agent has made an improper offer, call the Consumer Help Line.
- Insurance companies sometimes market life insurance policies as retirement savings tools, estate plans, election funds, or mortgage protection. Not clearly identifying a policy as life insurance is a misrepresentation and a violation of the law. If you believe an agent or company has misrepresented a policy, call the Consumer Help Line.
- A few simple guidelines can help you avoid becoming a victim of insurance fraud:
- Never pay cash for a policy.
- Never sign a blank application.
- Never buy insurance over the phone or on the first visit.
- If you think you need help choosing the right policy for you, have a friend or family member visit the agent with you. The agent shouldn’t object.
The cash value of a life insurance policy is considered as an asset when determining if you’re eligible for Medicaid. Some or all of the earnings from a loan using the policy as collateral might not be considered an asset under certain circumstances. If you’re on Medicaid, you should talk to an attorney or financial adviser to understand any consequences of owning life insurance.
The cash value of a life insurance policy generally accumulates tax-deferred. This means you don’t pay taxes on it until later. Withdrawals from the cash value are generally nontaxable until the withdrawal amount exceeds the total amount of premiums paid into the policy.
The law generally considers a death benefit to be reimbursement for a beneficiary’s loss, and not income. Beneficiaries usually don’t have to pay federal income taxes or an inheritance tax on a life insurance settlement.
If a policy does not list a beneficiary, or the beneficiary is deceased, the death benefit is paid to the insured’s estate. Heirs to the estate must pay full taxes on the money. If you are considering buying life insurance, talk to an attorney or financial adviser to understand the tax consequences.
Unless a statutory exemption, such as fraud, applies, the cash value and death benefit of a life insurance policy are exempt from
- all demands in any bankruptcy proceeding
- execution, attachment, garnishment, or other legal processes.
You should review the price and coverage of your policy every few years to make sure you’re still getting a good value and the coverage you need. However, replacing an old insurance policy with a new one is not always a good idea. Consider the following:
- New policies usually take longer to build cash values and to pay dividends.
- The two-year contestable period begins again under the new policy. During this period, if you die and the company finds out that you gave wrong information on your policy application, it won’t pay the death benefit.
- If changing to a new policy means withdrawing early from a cash value policy, you could pay high surrender fees. The withdrawal will also count as income for tax purposes.
- You could become underinsured if the new policy does not provide the same benefits and coverages as the old one.
- You will probably have to answer additional health questions or have another medical exam.
State law requires agents to give you a notice advising you to carefully consider whether replacing a policy is in your best interest.
If you exchange a policy, your agent will earn a commission on the sale. Persuading someone to switch to a new policy to earn a commission, without regard to the implications for coverage, is against the law. This is called churning. If you believe an agent has improperly encouraged you to sell a policy to purchase a new one, you may complain to TDI.
Sometimes you might need to convert your life insurance policy to cash or use some of the money that would have paid the death benefit. People sometimes do this because they outlive their retirement savings or become seriously ill and need expensive care or treatment.
A life insurance policy is personal property. You can sell it just as you would your other property, but there are special rules. You can sell you life insurance policies to an authorized viatical and life settlement provider for a percentage of the policy’s death benefit.
If you have a terminal illness, you can sell your life insurance policy and get a viatical settlement. To do this, a doctor must determine that you have two years or less to live. Under federal law, all earnings from a viatical settlement are tax free.
If you don’t have a terminal illness, you can sell your policy and get a life settlement. You must pay taxes on any money you earned from a life settlement.
The settlement provider will only pay a percentage of the policy’s face value. For example, a viatical/life settlement provider might pay $75,000 for a life insurance policy that will pay $150,000 when the policyholder dies. There are no laws requiring a certain minimum sale amount. Settlements typically range from 25 percent to 75 percent of a policy’s face value.
It’s a good idea to talk to several settlement providers because prices vary. Settlement providers usually look at the following factors to decide how much to pay for a policy:
- Your life expectancy. Settlement providers will pay more for policies if you have a shorter life expectancy. Therefore, the sale price of a viatical settlement is usually much higher than that of a life settlement. Most settlement providers won’t buy a policy in a life settlement unless you are 65 or older.
- Current interest rates. The amount of a policy’s death benefit typically does not increase relative to interest rates. When interest rates are high and other investment options become a more attractive alternative to viatical or life settlements, you can expect to receive less for your policy. When interest rates are low, your policy will be worth more.
- Policy premium rates. Because the settlement provider assumes all future payment obligations, a policy with lower premiums is worth more.
- Whether the policy is contestable. The sales price will be substantially less if your policy is within the contestable period because the company can deny payment of the death benefit under certain circumstances. Most settlement providers will not buy policies that are still in the contestable period.
The income you earn from a viatical or life settlement could affect your eligibility for Medicaid or other government benefits. The income might not be exempt from bankruptcy or creditor proceedings. Before entering into a viatical or life settlement, talk to an attorney or financial advisor.
Viatical and life settlement providers, provider representatives, and brokers (agents who represent policyholders to negotiate settlement transactions) must register with TDI. For a list of registered viatical and life settlement providers, provider representatives, and brokers, call the TDI Consumer Help Line or visit the life insurance section of our website. For questions and assistance with viatical and life settlements, call TDI’s Life, Annuity, and Credit Section
Alternatives to Consider
There are other ways to convert a policy to cash. Here are some other options:
- If your policy has a cash value, you may cash it in.
- Many lending institutions will give you a loan using your policy as collateral.
- A policy with an accelerated benefits provision or rider will prepay all or some of the death benefit before you die if you are diagnosed with a terminal illness, specified disease, or long-term care illness.
Life insurance companies, agents, and brokers may sell annuities as a type of investment. Some annuities can provide a steady income over a long period of time. People often buy annuities to provide income in retirement.
An annuity’s earnings grow tax deferred. Therefore, investors who want to limit their tax liability frequently buy annuities.
Annuities are not the best investment for everyone because they usually take at least seven to 10 years to become profitable because surrender charges may apply. Annuities are almost never a good idea as a short-term investment.
When you buy an annuity, you pay a premium into a particular investment fund or account. Many investors buy versions of the same annuity. All of the buyer’s premiums are pooled into the fund or account, which earns profits. In return for an administrative fee, a share of the profits, or both, the company managing the annuity agrees to pay you a return on your investment.
If you are considering buying an annuity, talk to a financial adviser. For more information, read TDI’s Understanding Annuities publication.
For answers to general insurance questions, for information about filing an insurance-related complaint, or to report suspected insurance fraud, call the Consumer Help Line between 8 a.m. and 5 p.m., Central time, Monday-Friday, or visit our website
463-6515 in Austin
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The information in this publication is current as of the revision date. Changes in laws and agency administrative rules made after the revision date may affect the content. View current information on our website. TDI distributes this publication for educational purposes only. This publication is not an endorsement by TDI of any service, product, or company.
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