Have a Life Insurance policy that you no longer need?
Is your Life policy about to lapse?
Would you like to use the death benefit before you pass?
Individuals have the ability to “cash in” their life insurance policy contracts by selling them for a lump sum. These policies are purchased by institutional investors who pay you a lump sum now to eventually collect the future death benefit upon your demise. This is called a Life Settlement.
The amount paid for the policy, usually more than the policy’s cash surrender value, is a discounted percentage of the policy’s net death benefit and represents the present day value of the policy. This purchase price is determined by considering the insured’s estimated mortality (life expectancy) and the associated cost of premiums to keep the policy in force for that timeframe. With a Life Settlement, you turn a life insurance policy into a liquid asset and immediately useful while an investor pays the premiums to keep the policy active on you until you pass.
Life Settlements can be transacted with either permanent or convertible term policies. Selling permanent policies like universal life or whole life is the most common transaction.
However, term life with conversion options also works very nicely. Term settlements, also called term-to-perm settlements, involve settling term life policies that have been converted to a permanent policy like universal or whole life. Most policies will be required to convert to a universal life policy versus whole life though. Usually, the conversion is done as part of this settlement transaction. So as long as the term policy has a conversion feature built into it, then it can be converted and settled.
Typically, an owner may convert his or her term policy to a permanent policy any time until the earlier of the level term period or the policy anniversary date following the insured’s 70 – 75 birthday. Some policies will provide an exception to this rule by allowing an insured to convert the policy within the first 5 years if the policy was purchased after age 65 – 70. This is usually completed without evidence of insurability or additional underwriting.
There are many changes in one’s lives and other circumstances that can reduce or eliminate the need for an existing life policy. Here are some examples:
Criteria To Sell
In order to potentially sell your life insurance policy, there are some general minimum criteria that one should have. Here are the main requirements:
The general process for settling is as follows:
Life Settlements are generally subject to taxation. However, the entire amount you receive may be taxed in at least three different ways.
The amount equal to the amount the seller has previously paid in premiums may not be taxed at all. The amount equal to the cash surrender value minus premiums paid might be taxed as ordinary income. While the amount received minus the greater of the cash surrender value or premiums paid may be taxed as a capital gain. Please see the illustration below:
12-Year Old $1,000,000 Universal Life Policy
We recommend that sellers consult their tax professional for proper planning and reporting of their sale of a life insurance policy.
So what do the insurance carriers feel about these settlements? Insurance carriers dislike the Life Settlement industry because it means fewer policies that lapse before the death benefit it paid, thereby reducing the life insurance companies’ profitability that traditionally anticipates high lapse rates. Insurance carriers would instead greatly prefer that the policy owners would simply surrender their policies for the cash value of the policies. This would be financially beneficial since the amounts paid during the life of the policy for “death benefits” would turn out to be free money to the insurance carriers. Some carriers have also chosen to offer Life Settlements for policies purchased from that carrier in the past.
We feel Life Settlements are a natural evolution of life insurance products. If you consider a life insurance policy to be a financial tool like any other asset in a consumer’s financial plan, then you would expect to be able to access its market value.
Most consumers feel the only option to actual liquidate their insurance assets was to collect the cash surrender value…until Life Settlements.
If you would like more information or assistance with Life Settlements or other benefits, please contact me
Logan W. Simios
Principal, Benefits & Financial Division