For seniors with
declining health and limited finances, a cash payout can be a godsend. Life settlements may be the answer, but
there are a number of factors to consider before you sell your life insurance policy.
A life settlement
or "senior settlement" is where you sell your unwanted or unneeded
life insurance policy to a third party, which in most cases is an investment
company.
A life settlement
allows you to receive a cash payout in exchange for your insurance policy while
you are still alive, it eliminates premium payments, and it accommodates the
changing financial needs of your dependents that may no longer rely on you for
financial support. The settlement buyer ultimately receives the death benefit
when you die.
Life settlements
have raised many questions in the insurance industry, including concerns about
possible insurance and investment fraud. Several insurance companies and trade
groups warn policyholders about the consequences of selling their policies to
third parties.
Unlike viatical settlements, which are sales of
policies by those who are terminally ill, life settlements are sales of
policies by folks who have impaired health.
Before you enter
into a life settlement, it's important to determine whether selling your life
insurance policy is your best option.
A life settlement
investment company buys life insurance policies by paying a percentage of the
face value to the sellers.
From the
investment company's perspective, the shorter your life expectancy, the greater
the potential profit— and the higher the percentage of your death benefit you
should receive as a life settlement. You generally must be 65 or older to
receive a life settlement and your life expectancy must be two to 18 years;
some life settlement buyers will purchase policies only from sellers age 70 and
over.
Here are some main
reasons policyholders consider selling:
- The policy is simply
no longer needed.
- Beneficiaries don't
need the death benefit.
- The insurance premiums have
become unaffordable.
Make sure to check
out a potential buyer as much as possible. A good place to start would be your
state's department of insurance.
How it works
A potential buyer
must calculate the possible life expectancy of the seller in order to make an
appropriate offer. You'll be asked to sign an authorization to release your
medical and other personal information; this is good time to understand the
life settlement company's privacy practices and how it shares information with
others.
Among the factors
that are used to calculate the buying price are: the death benefit amount
(generally no less than $100,000 and usually higher than $300,000); the age and
health of the insured person; the type of policy (whole, universal or term);
the rating of the insurer that issued the policy; and the premiums needed to
keep the policy in force.
When the investor
buys the policy, it becomes the new policy owner, pays all future premiums and
collects the entire death benefit when the seller dies. The settlement company
will likely set aside the estimated future premium payments in an escrow
account.
The buyer takes on
a certain financial risk: They don't know exactly when you are going to die and
they are paying the premiums until you do. Life settlement transactions are
typically handled by investment firms and sometimes bundled into securities.
Reputable life
settlement brokers will keep your personal information as a confidential
portfolio asset.
Life settlement
companies use various methods to determine when an insured dies so that they
can submit the claim. Some firms periodically send a postcard asking you to
send it back. If the postcard is not returned, the company investigates
further. Others designate a third party (a lawyer, for example) to stay in
touch with you.
Look before you
sign
While life
settlements are a good option for some, the insurance industry warns policyholders
to be careful. The American Council of Life Insurers (ACLI), a Washington
D.C.-based trade group, points out beneficiaries will lose valuable insurance
benefits if the policies are sold to an investor. Also, if someone sells his
life insurance policy and his health is less than optimal, future insurance
coverage might not be attainable.
Life
insurance companies generally want
customers to examine all options available with their current policies before they
decide to sell. In addition, anyone considering selling a policy should consult
a financial planner or attorney before signing a contract, plus their state
insurance department to find out applicable laws.
Beware of schemes
The life
settlement business is commonly regulated by the state's insurance department
or the securities commissioner, but it is still good practice to ask the
company if it's licensed. If you're not using a broker to shop around your
policy, negotiate with several provider firms to determine the market value of
your policy.
Avoid these
well-known schemes if you are considering selling your life policy:
"Clean sheeting."
This is when someone partners with an investment firm to "doctor"
their medical report to improve their health on paper and then buys a life
insurance policy they otherwise would not have been able to get, for the
purpose of selling it to an investor.
The
"stranger-owned life insurance" (STOLI) scheme. In this arrangement,
a speculator convinces a senior citizen to buy a life insurance policy for the
sole purpose of transferring the policy to the speculator shortly after the
sale. Seniors may get a sales pitch about "free life insurance" or
other financial incentives. In response we developed model legislation that
calls for a five-year moratorium on the sale of a life policy after it has been
purchased. Many states such as Arizona
prohibit the sale of STOLI policies.
There is an
important distinction between legitimate life settlements and STOLI: "We
understand that people who purchased life insurance to protect their families
may want to investigate the possibility of a life settlement after their
coverage needs cease. The real problem is with manufactured sales, where elders
in particular are induced to secure coverage so that third parties can greatly
profit from their demise."
"Flipping."
Although not a scamper se, the flipping of life insurance policies has been
receiving attention."Flipping" is when a person — often someone with
substantial financial resources — buys a large face value policy for the
purpose of quickly selling it for profit. TV host Larry King sued an insurance
brokerage over his life settlements after experiencing major flipper's remorse.
What to do before
you sell
Consider these
tips when selling your life insurance policy:
- Comparison shop by
getting quotes from several companies.
- Find out how much
tax you'll pay on the proceeds from selling your policy.
- Find out if any of
your creditors could claim your policy benefit.
- Read the privacy
notice outlining who will receive your personal information when the buyer
wants to periodically check on your health.
- Make sure all life
settlement application forms are completed accurately, especially your
medical history.
- Make certain you
have the right to change your mind after you receive the proceeds. Ask how
many days you're allowed to reconsider.