Life insurance lawyers will eventually see a situation where a client has bought or sold a life insurance policy to or from a third party. Insurancenewsnet.com published an article dealing with this subject that is worth reading. The title is, 5 Key Questions Asked About Selling A Life Insurance Policy For Cash.
Today’s seniors face many unforeseen challenges, particularly as costs continue to rise for everything from groceries to medications. Further, many retirees are just scraping by without any cushion to pay for emergency expenses.
This ongoing erosion of assets threatens an entire generation of seniors who currently are struggling to pay retirement costs. And unfortunately, it might be even worse for baby boomers and Generation X according to an Associated Press analysis of savings data from the Federal Reserve. The study found that 35 percent of households in their prime earning years have nothing saved in a retirement account and no access to a traditional pension. For seniors facing a financial crisis or for those just looking to bolster their emergency funds, a life settlement may be an answer.
Although life settlements have been around for nearly 20 years, many seniors either haven’t heard of them or don’t truly understand how these financial transactions can improve their golden years. (Life settlements are sometimes referred to as viaticals.) Put simply, a life settlement (sometimes called a life insurance settlement) is a financial transaction enabling a senior to sell an existing life insurance policy for immediate cash. It enables a retiree, for example, to sell a policy for a percentage of the overall death benefit. A senior might sell a $1 million life insurance policy and receive several hundred thousand dollars immediately. Although most people view life insurance as an ongoing cost, it is, in fact, an asset with an inherent value that can be sold to a life settlement company.
First question – Why would someone want to sell a life insurance policy?
Most people purchase life insurance for a specific reason, such as to provide for a surviving spouse, pay expenses for children, pay future estate taxes or for other business purposes. People sometimes purchase insurance and hold it for decades, to offer peace of mind if an emergency ever arises.
However, as time passes, the need for life insurance may change. A spouse passes away or a couple gets divorced. The children grow up, move out of the house, and become productive and prosperous citizens. Or estate planning needs change, and the assets that life insurance was meant to protect change and evolve. Perhaps it might be helpful for a beneficiary to receive money now, rather than wait for a future death benefit payment.
In these situations, a senior may no longer need the life insurance, even though it served a valuable purpose for many years. Adding to the equation, the cost of life insurance may increase over time and paying the premiums may become difficult or even impossible. In these situations, it often makes sense for a senior to research a life settlement and consider selling an existing life insurance policy.
Second question – Who can sell a policy?
Although anyone can sell a policy, most individuals who choose to pursue a life settlement are in their mid- to late-70s and typically not in perfect health. They must have an existing life insurance policy that is either a whole life or universal life policy – or is a term policy that is near the end of the term (these policies can be converted). Group policies are not eligible.
The face value of the insurance policy is one of the main factors determining the offer. Life settlement companies typically want policies in excess of $500,00. Through a new type of transaction called a retained death benefit, a senior also may be able to sell a portion of a life insurance policy, keeping part of the coverage intact for beneficiaries.
Third and Fourth question – What information is needed to be provided and is a medical examination needed?
Those considering a life settlement need to provide a copy of the insurance policy along with a document known as an illustration. This provides a history of the policy’s value, the payment history and other important information.
Individuals are not required to undergo a medical examination, but they will have to give a life settlement company permission to access medical records. In the early phase of evaluation, it may be necessary to give only a general medical history along with a list of current medications. Note that life settlement companies comply with all Health Insurance Portability and Accountability Act regulations and access only information authorized by the policyholder.
Fifth question – How much is a policy worth?
A life settlement offer is based on a number of factors. They include the face value of the policy, the amount of premium needed to keep the policy in force, the seller’s medical history of the seller and the seller’s life expectancy. Each transaction is different, and a final offer will not be made until all the different factors are evaluated. Generally, a policy owner receives between 15 percent and 20 percent of the policy’s face value. For those struggling with the cost of their current insurance or just trying to figure out how to have a less stressful retirement, a life settlement may be an answer worth considering.