If you are 65 or older and you own life insurance that you may not need any longer, chances are good that you have thought about the idea of selling the coverage to a 3rd party investor.
Selling a life insurance policy may not appeal to everyone. Known as a life settlement transaction, there can be significant differences in what you receive from an independent 3rd party buyer versus the life insurance company that issued the policy. With disclosure and transparency firmly in place in most states, it is in your best interest to consider selling unwanted policies and comparing the difference you will receive from that offered by the insurance company.
Ninety percent of seniors who lapse policies without knowing about a life settlement indicated they would have considered that option had they known about it and 79 percent feel their advisors should have informed them of the option.
Depending on several factors, including age, health and the type of policy you own, there can be significant secondary market value and that may translate into being paid 20-30% of the policy’s face value. Many people consider lapsing or surrendering a policy because they no longer want to pay premiums for an asset they no longer need or can afford. Before surrendering or selling a policy, talk with professionals.
The benefits of a life settlement:
- Receive a higher cash payout than cash surrender value.
- Receive money for a term policy before its conversion date.
- Create cash to fund alternative coverage such as guaranteed income annuities, long-term care insurance or life insurance with the installment payout option.
- Donate proceeds or policy to a charity for tax deduction.
Once you thoroughly understand fact from fiction, you are more likely to make a decision in your best interest. The decision to sell an unwanted life insurance policy is still considered a new option for policy owners. It takes time in the insurance industry for “new” to become “normal”.
Many life insurance companies were initially opposed to their policyholders selling policies instead of lapsing them or cashing them in for surrender value. To put this in perspective, opposing the sale of your policy to a 3rd party is the equivalent of Ford opposing the sale of your car to carmax.
The economics of selling a policy can be superior to the alternatives. Nearly 30 year ago, 46 year old, Dr. Smith purchased $2,000,000 of life insurance to protect his wife and 14 year old daughter against the loss of his $300,000 income. Today, at 75, his daughter is a successful 43 year old attorney and the income protection “need” is gone.
With an offer to sell his policy for $300,000 to a life settlement company or cash it in for $100,000 of surrender value, the decision appears to be simple. Unfortunately, each year there are thousands of people who are unaware of the life settlement option or they do not give proper consideration to the risks and rewards.
Potential Disadvantages:
- Life Insurance benefits are usually income tax-free. Life Settlements on the other hand may be subject to income tax.
- Paperwork is required to transfer the ownership of the policy.
- Proceeds will benefit buyers, typically non-family members.
When you are ready to consider the settlement option, seek out an experienced life insurance professional. The right life insurance professional will understand your objectives, should have access to the relevant settlement brokers and should help you interpret the offers from competing buyers.
If you own life insurance, have it reviewed. There is no downside to having your coverage reviewed and assessing your goals and objectives at the same time. Life insurance is enjoying a period of innovation, offering better value across the board. A professional analysis of your mortality risks and longevity risks will prove to be time well spent.
Email me at: TBernstein@LifeInsuranceConcepts.com or call me at Life Insurance Concepts, 561-988-8984.
BIO
Ted Bernstein of Boca Raton, Florida, is an expert in life-cycle risk planning. Specializing in mortality and longevity risk issues, he is a life insurance professional and nationally recognized innovation expert in risk based insurance solutions. With decades of speaking out and advocating for changes on behalf of consumers, he was the first to introduce life insurance without commissions or “no-load” life insurance in the mid-1980s. His most recent innovation, the Installment Payout Option, is a game-changing alternative for how policy proceeds are protected. To learn more, visit TedBernstein.com or call 561-988-8984.