• Exchange your policy for one with lower premium costs or different features. Under what the Internal Revenue Code calls a 1035 Exchange, you can exchange a life insurance policy for a new one without paying tax on the investments earned by the original policy.

This can be a big bonus depending on your financial situation. However, keep in mind that you have to exchange the policies, not cash one in and then use the money to purchase a new insurance policy later. Under this rule, you can exchange an existing life insurance policy for a new life policy or for an annuity.

But, it won’t allow you to exchange an annuity contract for a life insurance policy.

• If you need cash, you might want to consider taking a loan out against your policy. This would allow you to keep the policy, but you could get cash in hand to pay bills. Here’s the down side: You’d likely have to pay interest on the loan, and if you died, the net death benefits would be less the amount you
borrowed, plus interest.

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There are four basic types of life insurance policies that can be considered for life settlements:

Term Life: Provides life insurance coverage for a specific term, or time period. It tends to be the simplest and most affordable life insurance coverage.Your premiums can either be level — meaning you will make the same premium payment throughout the contract terms — or will increase as you age or at the end of each renewal period.

If you die during the policy’s term, your beneficiaries receive the death benefit payment. At the end of the term, or time period, if you are still alive, you typically receive no payment.

However, some insurers have a variation of this type of term policy, called return-of-premium term life. As its name implies, this policy would return all premiums to you at the end of the term, and could return some premiums if you cancel the policy earlier. Premiums are higher for this product than for traditional term life.

Whole Life: Also called ordinary life, this is a policy that covers you for your entire life (not expire at a set period, as does term life). Your premiums are invested, and the value of the policy can build up over time. Your premiums typically remain the same for your entire life, and when you die, your beneficiaries will receive the death benefit.

Universal Life: This policy allows you to access the risks and rewards of interest rates. Your premiums are invested, and if your money earns enough interest, you may be able to skip premium payments. However, if the interest rates drop, you might find yourself owing higher-thanexpected premiums. Like whole life, this policy protects you as long as you live, and does not expire after a period of time.

Variable Life: This is a variation of whole life, and offers a fixed premium schedule and a minium death benefit. The cash value of the policy is invested in securities. You can chose the mix of investments the policy is invested in, and the insurance company does not guarantee investment returns, so the policy’s cash value can change.

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Terms to Know

Life Insurance: an insurance policy that is designed to pay beneficiaries a sum of money when the policy owner dies.

Premium: the money you pay for insurance coverage

Beneficiaries: the people you pick to receive the proceeds from your life insurance policy when you die

Death Benefit or Face Value: the amount your life insurance policy would pay to your beneficiaries when you die

Cash Value or Surrender Value: the money you’d receive today if you canceled a life insurance policy

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