WHAT’S THE DIFFERENCE BETWEEN CASH VALUE AND FACE VALUE?

What's the Difference Between Cash Value and Face Value? Happy smiling grand daughter and grandmother.

What’s the Difference between Cash Value and Face Value?

Owning life insurance is an essential part of being a responsible adult, but making the right decision regarding which type to purchase can be daunting. It’s important for policyholders to understand their options and what differentiates term policies from permanent ones as well as cash value versus face value in order to make sure they get the best coverage that fits their needs. Additionally, if you decide you no longer need your life insurance policy, it will pay off to know how cashing out works!

Reasons to No Longer Need Your Coverage:

There are many reasons for getting a life settlement. Below are several common reasons to no longer need coverage.

  • Often one finds themselves over covered, or they don’t need their coverage anymore because their children are grown and financially independent. The original purpose of having coverage is no longer needed.
  • The life insurance premiums are too expensive. Often seniors find themselves with coverage they no longer want with insurance premiums too high. With growing, unaffordable premiums, a life settlement is often the perfect answer for many seniors who are looking to turn the financial burden of their policy into a cash asset.
  • The cash from your life settlement is needed to fund your retirement, increase your financial freedom, or upgrade your living lifestyle.
  • One has unanticipated medical or healthcare expenses. A life settlement or viatical settlement can be used to pay for much needed medical treatment, surgeries, or rehab, as well as covering long term care.

If any of these reasons apply to you and your current situation, then a life settlement may be a great option for you.

When deciding how to maximize your gains with a life settlement, it helps to understand the difference between cash value and face value in life insurance.

Face Value vs Cash Value in Life Insurance

The face value and death benefit of a life insurance settlement market are the same. For instance, a $500,000 policy has a face value and death benefit of $500,000.

Life insurance policies accumulate cash value over time as premiums are paid, which can be accessed in two ways. Policy holders may borrow against the accumulated funds or surrender their policy for a payout. Repayment of loans allows policyholders to keep their plan active and access its benefits when needed most.

If you have an outstanding loan balance on your life insurance policy, it will be taken from the death benefits. However, selling your policy through a life settlement broker can provide you with much-needed cash while still alive – enabling you to reap the rewards of having had foresight and investing in such coverage!

Options for Accessing the Cash Value of Your Life Insurance

If you want to make the most of your life insurance policy, it’s essential that you understand cash value versus face value. Knowing this information can help unlock the financial benefits available in your policy!

If you own a permanent life insurance policy, it can be an advantageous investment. Your premiums will accumulate cash value over time and there are two ways to access this money: either through surrendering the policy or by taking out a loan against its accumulated value. Term policies typically do not offer these benefits, so understanding your type of coverage is important if considering accessing funds in this way.

Taking out a loan on your policy can be a good option if you are suddenly in need of cash but want to keep your policy in force. As long as you continue to pay your premium and the loan back, the policy and death benefit will remain intact.

Another option is to cancel your coverage by surrendering your policy for the cash value. This allows policyholders to forfeit their policy back to their insurance carrier for a portion of the accumulated cash value called the surrender cash value.

The last option is to sell your life insurance policy. Selling your life insurance can bring 4-10 more than forfeiting the policy for the surrender cash value. To help better understand how life settlement works, let’s look further into the types of life settlement options available.

Two Types of Life Settlements

When considering selling your life insurance, it helps to understand the two types of life settlements – traditional life settlement and viatical settlement. They are similar but have different eligibility requirements.

Traditional Life Settlements are the most common settlements. In general, one must have a minimum $100,000 policy face value, be minimum 65 years old, and have a permanent and transferable plan.

Viatical Settlements, on the other hand, are for policyholders with terminal or chronic illness with less than two years of life expectancy. While one must have a minimum of $100,000 policy face value to be eligible, there is no age requirement and term plans can be eligible.

Both options involve selling your life insurance for a one-time payment to someone who takes over payments and ownership of death benefit. The main difference between the two is that viatical settlements are tax-free, because they’re seen as an advance on one’s death benefit.

Can a Term Policy Be Sold?

Certain Term policies can be sold. If one has a term policy and is suffering from terminal or chronic illness with less than two years of life expectancy, then they may be eligible to sell their term plan with a viatical settlement. If one is not eligible for a viatical settlement and would like to sell their term life insurance, then their term plan must have a convertible rider. This is a provision that allows the policyholder to convert their term plan into a permanent plan. Here, the term plan would have to be converted to a permanent plan before it’s sold.

Why Use a Life Settlement Broker?

Using a Life Settlement Broker often results in a return multiple times what the policyholder would have received shopping on their own. Brokers allow policyholders to benefit from receiving multiple offers for a policy off of one application rather than just one. If one is shopping on their own, each buyer contacted will require underwriting and medical evaluations which will take a few weeks prior to receiving just one official offer and then at the end, they have to start all over again.

It’s a complicated process. Having an ally on your side to help guide you along every step makes a huge difference. Life settlement brokers have a fiduciary duty to look out for a clients best financial interest. Buyers do not and are solely profit oriented. An experienced broker will know how to represent your policy in the secondary market in order to maximize your payout.

Next, let’s look at the steps to selling your life insurance through a broker.

Steps to Selling Your Life Insurance

Once you understand the terms and different types of settlements, the next important part to understand is the process. There are nine step to selling your life insurance through a broker. They are the application, documentation, review and underwriting, auction, the offer, closing process, the escrow, transferring of funds, and lastly, the rescission period. Let look more into the steps below:

  1. The Application – First step asking about your age and health as well as policy. You will also be asked to sign medical release and insurance release forms.
  2. Documentation – The release forms are used to gather all necessary documentation.
  3. Review and Underwriting – At this stage, your application and documentation will be reviewed, and an underwriter will prepare a life expectancy report. An independent Life expectancy report may be ordered as well.
  4. Auction – Once your package is prepared for the secondary market, the auction process will begin giving buyers the opportunity to bid on your plan.
  5. The Offer – Once the auction is complete, your offers will be presented to you where you can decide to either accept or decline.
  6. Closing Process – When an offer is accepted, a closing package is prepared including documents signing over beneficiary and ownership.
  7. The escrow – Funds are sent into an escrow account pending transferring of ownership and beneficiary documents.
  8. Transferring of Funds – Once transfer of documentation is verified complete, the escrow funds are released minus broker and escrow fees.
  9. Rescission Period – The rescission period of two to three weeks depending on the state is the time-period one has to change their mind in order to cancel the life settlement and reinstate their policy.

Summary

Understanding the terms Cash Value and Face Value can help life insurance policyholders when deciding what to do with a plan that’s no longer needed. Through a licensed life settlement company, one can receive four to ten times more than what they would have received for surrendering the policy for the cash value. Life settlements present the perfect option for those policyholders who want to maximize their gains when cashing out. 

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