Do You Have a Reason To Sell Your Life Insurance Policy?
A life insurance settlement presents a unique opportunity to a policy holder to extract the maximum possible value from an existing life insurance policy. He can repurpose those funds for alternative needs. Many people choose this option to sell the life insurance policy because the cash value of a life settlement generally exceeds the surrender value that would have been paid by the life insurance company.
A life insurance policy is personal property just like a house, car, stocks and bonds. You can sell your life insurance policy like you sell other personal property items. The sale of life insurance policy is called a life insurance settlement, life settlement or senior settlement.
When the life insurance policy owner sells his own life insurance policy by pursuing a senior settlement transaction, he transfers all rights and obligations to a new owner. The purchaser of the policy will then become the new owner and the new beneficiary of the policy. He’ll be responsible for making all of the future premium payments. And, of course, the new owner now collects the full amount of the death benefit when the insured dies.
Senior life insurance policies are sold for many different personal or business reasons. Below are some of possible reasons for considering a life insurance settlement:
- The original purpose for the policy no longer applies.
- The beneficiary of the policy died and no alternate exists.
- Policy holder is chronically ill so selling the current policy provides needed funds to cover financial burdens caused by illness. A viatical settlement gives the ability to regain needed financial security.
- If policy holder is over the age of sixty-five, a life insurance settlement transaction maximizes the current assets by eliminating premiums and getting required funds that can be used today.
- Insured person wishes to distribute its value as while he or she is living.
- Personal financial situation has gone bad and unable to make premium payments.
- The policy owner’s current asset mix is weighed too heavily in life insurance and the senior life insurance settlement provides diversification.
- Owner wishes to invest in a more appropriate product, such as a lower cost survivor policy, single premium annuity for supplemental income, long term care insurance, or other asset protection tools.
- A family trust has eliminated the need for senior life insurance coverage.
- Policy holder needs cash to fund senior health insurance that present insurance does not cover.
- Policy was purchased to ensure the availability of funds to pay off a mortgage but the mortgage has been paid.
- When a policy is in danger of getting lapsed the policy holder can turn it into cash.
A life settlement (aka senior settlement) involves selling an existing life insurance policy to a third party for more than the policy's cash surrender value, but less than the net death benefit. Life settlements involve policyholders who generally have a life expectancy of between two and ten years. The buyer does not want to buy just any senior life insurance policy--they would rather buy a policy that will pay off in the not too distant future so elderly life insurance policies are preferred or polices owned by those with significant health risks.
Life insurance settlements can be a valuable source of liquidity for people who would otherwise surrender their policies or allow them to lapse—or for people whose life insurance needs have changed. But they can have high transaction costs and unintended consequences.
How do life settlements work?
The purchasers of life insurance settlements either hold the policies to maturity and collect the net death benefits or resell policies to other investors. In exchange, you, the senior life insurance policy owner, receive a lump sum payment. The amount you’ll receive depends on a range of factors, including your age, health and the terms and conditions of your policy—but it is generally more than the policy's cash surrender value and less than the net death benefit.
Whoever buys your policy acquires a financial interest in your death. In addition to paying you a lump sum for your policy, the buyer agrees to pay any additional premiums for as long as you live. In exchange, the buyer will receive the death benefit when you die.
Factors you should consider:
- If you are considering buying a new policy with the proceeds of the life settlement, you will need to determine whether you will be able to get a new policy with equivalent coverage since your old policy will still be in effect.
- If you can get a new policy, you may have to pay higher premiums because of your age or changes in your health status.
Alternatives to a life insurance settlement:
If its cash you need:
- you might want to see whether you can borrow against your policy.
- if you have a long-term, catastrophic, or terminal illness, see if you’re eligible for accelerated death benefits so you can receive benefits on your policy prior to dying.
If your goal is to retain coverage but lower the premiums:
- you might want to consider the option of reducing your existing amount of policy coverage, or
- get another policy through a "1035 Exchange." The Internal Revenue Service allows you to exchange an insurance policy that you own for a new life insurance policy insuring the same person without paying tax on the investment gains earned on your original contract—which could be a substantial benefit. Section 1035 of the Internal Revenue Code, governs "1035 Exchanges."
Don’t be So Quick to Sell That Life Insurance Policy
Do you own a life insurance policy that you no longer can afford or want? Perhaps you’re tempted to sell it to an investor who has offered you a way to get money from this relatively illiquid asset. However, before you take the cash, be sure to get all the facts. You just might be better off keeping the life insurance or surrendering it.
Life settlements are frequently directed towards people over age 65 who own life insurance policies with at least a $100,000 face value, have some health problems, and have a life expectancy of 2 to 15 years. When you sell a life insurance policy to a third party, you will no longer be responsible for the premiums. The investor will make all future payments to the insurance company and collect the death benefit after you die.
This concept could be attractive if you think you don’t need the coverage, your beneficiaries have died, or you want the money for other things, such as long-term care insurance. But what is the cost?
These transactions can possibly have high commissions and tax implications to sellers. A study by Deloitte Consulting and the University of Connecticut found that life-settlement companies, on average, paid only 20% of the face value of the policies to the sellers. Whereas the estimated future returns to investors were 64% of the face amount. Therefore, if you want to pass on the maximum amount to your heirs or a charity, you might be better off keeping the policy.
But suppose you need the money? Instead of selling the policy, a better choice could possibly be selling other assets, such as securities. Or you could take a loan from the policy. Another idea is to have your beneficiaries assume the premium payments—after all they’re the ones who will eventually benefit the most.
So how can you determine if a life settlement company is offering a fair price?
Compare it to your other options, such as the policy’s surrender value. Think about this: You most likely bought the life insurance policy when you were healthy. And the insurance company based the future surrender values on your health at that time. These values do not change, regardless of declining health status. Conversely, the life settlement company will use your present medical condition to come up with their offer. Therefore, as the level of your impairment increases, so should the amount of the offer.
Of course don’t forget about the income-tax free death benefit your beneficiaries won’t receive if you get rid of the policy. And in case you’re still not sure what to do, remember that a seasoned, institutional investor wants to buy your policy. Consequently, it must have a significant value. I always advise clients to consult with their own qualified tax and financial advisor prior to making any investment decisions.