Thursday, November 4, 2010

Life Insurance Settlements

Until recently, people with unwanted life insurance would either: 1) Let their policy lapse when they couldn't pay for it or 2) Surrender the policy back to the insurer for the cash surrender value.

However, Life Insurance Settlements — also known as Life Settlements or Senior Life Settlements — are a new type of financial service being popularized by specialized brokerages. These brokerages sell your life insurance policy to institutional investors for typically three to five times the cash surrender value of the policy.

A life settlement is a financial transaction in which the owner of a life insurance policy sells an unneeded policy to a third party for more than its cash value and less than its face value. Until recently, if a policyowner opted out of a policy by surrendering the policy or allowing it to lapse, the additional value was relinquished back to the issuing life insurance company. In some cases, an insured’s health may have declined since the policy was issued and the policy may be worth considerably more than the surrender value. A life settlement is an alternative to this surrender or lapse of a policy, or when the owner of a life insurance policy no longer needs or wants the policy, the policy is underperforming or can no longer afford to pay the premiums.

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Life Insurance Settlements are a new but fast growing service. Since 2001, over a billion dollars in excess of the cash surrender value has been paid to senior citizens who chose to sell, rather than lapse or surrender their life insurance policy. But many more could benefit from this product. According to the American Council of Life Insurers, almost nine out of ten universal life insurance policies are lapsed or surrendered. Furthermore, it is believed that 99 percent of term life insurance policies are lapsed without ever paying a death benefit.

Typically a Life Settlement broker can sell your policy to investors for a much higher price than the cash surrender value paid by the insurer. And, when done efficiently and according to industry best practices it is a great opportunity for everyone involved:
  • The life insurance policy seller collects a larger settlement than the surrender value for an unwanted insurance policy.
  • The life insurance policy buyer obtains a valuable contract with a life insurance carrier that will pay out a death benefit sometime in the future.
  • The insurance company continues to collect premiums (as paid by the buyer).

What are some of the reasons why you might consider the sale of my life insurance policy to a life settlement company?

Some of the reasons why you might consider selling your life insurance policy are as follows:
    • The life insurance policy is no longer needed or wanted
    • Premium payments have become unaffordable
    • Considering surrender of the policy
    • Policy is about to lapse
    • Change in estate planning needs
    • Change in financial circumstances
    • Change in life circumstances (such as divorce or death)

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Are there any fees involved in a life settlement?

A fee, commission, or other form of compensation is usually paid to the life settlement broker who negotiates a life settlement contract between the owner of the life insurance policy and the life settlement company.

How much money will I get if I enter into a life settlement contract?

The amount of money you receive will depend upon a number of factors, including, but not limited to, the age and medical condition of the insured, type of life insurance policy (e.g., universal life, whole life, term), amount of the death benefit, rating of the issuing insurance company, amount of premiums necessary to keep the policy in force, and amount of compensation the life settlement broker receives. You should contact several life settlement companies before selling your policy in order to obtain the best offer. Since you will be providing personal information to these unregulated companies, you should make sure that the companies you deal with have procedures in place to protect the confidentiality of your information. If you have a life insurance policy with a cash value, the amount you receive should be at least greater than the cash surrender value of your policy.

What happens to my life insurance policy after I enter into a life settlement contract?

The ownership rights and obligations under the policy are transferred to the new owner and a new beneficiary will receive the proceeds upon the death of the insured. This is an important decision that may have significant financial consequences for you and your family members. As such, you may want to include your family as part of your decision-making process before making any major changes to your life insurance policy.

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What are the alternatives to entering into a life settlement?

There are several options to explore:
    • Borrow against the cash value of your life insurance policy
    • Cash out the policy based on the available cash surrender value
    • Check with the life insurance company to find out if the policy can be converted to a paid-up policy or if the death benefit can be reduced in order to lower the amount of your premium payments
    • Use the life insurance policy as collateral to secure a loan
Are the proceeds of life settlements taxable?

Life settlement proceeds may be taxable. You should consult your tax adviser for additional information.


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