The Potential Downsides of Life Settlements

As we have learned so forcefully these past few years, most financial tools come with upsides and downsides. Life settlements are no different than any other financial tool. In this article, we look at the downside of this transaction.

The settlement of a life insurance policy is a serious decision. The amount of money we are discussing is significant, often in the hundreds of thousands of dollars, and that means you need to take your time to understand all the ramifications – positive and negative.

So, what are the downsides of life settlements? Well, the first and foremost negative is the fact you lose the long term benefits of the life insurance you have been paying for. Once the policy is sold, the purchasing investors will remove your beneficiaries and replace them with their choices. Your heirs will receive nothing from the policy, although you can still obviously bequeath them other items from your estate.

The second negative aspect to consider is the fact tax will have to be paid on the gains from the sale. As with any sizeable transaction, consulting with an accountant is a must to make sure you have a grasp of the situation. Keep in mind, however, that this is somewhat akin to complaining about the taxes on winning the lotto!

A third potential negative aspect of a life settlement is the effect a cash payment might have on any public services you are receiving. This would include payments or services like Medicaid, Medicare, Social Security and the like. If you receive benefits from such agencies, you must always investigate the effects of receiving a significant lump sum cash payment on said benefits.

Does all of this mean the life settlement is a bad financial move? Not at all as can be attested by the large number of such transactions that happen every year. It simply means that you should investigate both the positives and negatives just like you would with any significant financial transaction.

Thomas Ajava writes for LifeInsuranceLifeSettlement.com - where you can find life settlement life insurance professional advice on topics like viatical and life settlement transactions.