Life Insurance Settlements – Cashing Out At the End of a Policy
by Efin Advisor | November 17, 2009
The facts about Life Insurance Settlements are not well known to a great many policy holders. Just what is a Life Settlement anyway?
Simply put, a Life Settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its net death benefit.
Such a transaction is usually undertaken by those later in life for the purposes of estate or financial planning. Indeed, the redemption of a policy can put an additional financial option in the hands of American consumers at a time when they may need it most. But don’t expect your insurance company to fully advise you about your choices. The counsel of a trusted financial advisor, or an independent insurance agent can be helpful in suggesting your alternatives.
Why would cashing out a Life Insurance policy make sense? It really comes down to time and opportunity cost.
A policy may no longer be needed or wanted. As the Life Insurance Settlement Association points out, as circumstances change over time, so do insurance needs. Perhaps a spouse or another beneficiary for whom the policy was purchased is now deceased. Or, other policies may prove adequate to cover an insured person’s original goals.
With dramatic changes in insurance products and services in recent years, there could also be an opportunity to obtain a superior policy in place of a current one.
Other reasons for abandoning a life insurance policy could be changes in estate planning needs, or mounting financial concerns where the existing premiums for a policy no longer make budgetary sense compared to the cash value the policy may realize in the here and now.
When life insurance companies do not present a viable exit strategy, or offer a slim percentage surrender option, consumers may want to look elsewhere to divest their policies.
Life Settlement transactions are regulated in 34 states and in the territory of Puerto Rico. To find out more information about Life Settlements and about regulation in your state, visit the Life Insurance Settlement Association.
I had no idea that I could surrender my policy and get paid by someone other than my insurance company. It’s comforting to know I have that option and can get a different return on my investment while I am alive.
Reply
The life settlement, which can be especially useful for those facing costly medical bills, grew out of “viatical settlements” for terminally ill AIDS patients who did not have sufficient insurance. They paid for their care by selling their insurance policies. Those settlements ended as drugs prolonged the lives of HIV- positive patients.
While dying AIDS victims were able to get 30 percent or more of the value of the death benefit, according to the AARP magazine, most life settlements today pay between 15 percent and 25 percent on universal and whole life policies and on term policies that are convertible. Elderly people with health problems can get more.
If you’re healthy, under 70 and have a long life expectancy, you’re not a good candidate for a life settlement.
But you need not be ill to seek the cash of a life settlement. If you’re over 70 and the policy is paid up, or if you’ve been paying on it for years, it is as much of an asset as your home. Most people who can no longer afford the premiums let the policies lapse, which is what insurance companies count on. If you need the policy’s worth in your lifetime and your heirs don’t need the money, a life settlement could be a life saver.
Reply
I’m all for empowering consumers to convert their Life Insurance policies into a Life cash Settlement when they no longer have a beneficiary who would “benefit.” I am also staunchly opposed to the idea of bundling these policies as securities. Let’s keep the secondary marketing of these instruments under strict government regulation or we will surely see abuse and manipulation of this common sense practice.
Reply