Most Americans don’t take life insurance for granted because almost one out of every two Americans don’t have it.
According to the Insurance Information Institute, only about 54% of Americans had life insurance coverage in 2020.
About 50% of Americans overestimate the actual cost of life insurance. However, the cost of a life insurance premium increases the longer you wait to get it. For example, the average life insurance premium increases by 258% for a man between the ages of 25 to 50.
Life insurance is relatively affordable if you acquire it while young and healthy.
Many elderly Americans can’t get life insurance in their old age. And many that do have it find themselves struggling with financial woes that they know will only worsen for their beneficiaries after their passing.
Over 50% of Americans are struggling with medical debt. Collection agencies attempted to retrieve over $140 billion in unpaid medical debts from Americans in 2020 alone.
So, many elderly people with life insurance are selling it to life settlement companies to get a fraction of the coverage value now.
To better explain why this is a bad idea, we need to explain the concept of life settlement policies better.
What is a life settlement company?
A life settlement company profits by buying the life insurance coverage of people 65 and older. Once you sell your life insurance coverage, the company, broker, or investor you sold it to will automatically become the sole beneficiary.
The life settlement company will then pay the premium until death and profit as the sole beneficiary.
So, why is this a bad thing? Here are a few reasons.
No preferred beneficiaries
After your death, the life settlement company becomes the sole beneficiary of your coverage.
That means that your spouse, children, or anyone else who could have been named as a beneficiary will get nothing after your passing.
If you do sell your life insurance coverage, you will get an immediate payout. But it won’t be a lot.
Depending on your negotiation skills, you will be lucky to get anywhere between 10% to 50% of the face value of your life insurance policy.
While that may not sound like a lot, you must remember that life settlement companies profit by buying and becoming the sole beneficiaries of hundreds or thousands of life insurance policies.
You can only sell your policy if you are old and near-death
Life settlement companies usually only buy life insurance policies that benefit them and their bottom lines.
To sell your life insurance policy, you usually must be over the age of 65 and be in deteriorating or terminal health.
Otherwise, life settlement companies can’t profit by buying the policies of a healthy 65-year-old.
They may end up paying your premium for a decade or two, which isn’t profitable for them.