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You Can Turn Unneeded Life Insurance Policies Into Cash
By Wendy Goldband, MSW
In these difficult financial times you may be looking for ways to cut back on expenses. Letting your life policy lapse or surrendering it for the cash value may seem like a good idea. But did you know your life policy is an asset that you can actually sell?
Until recently, the only options for liquidating an underperforming or unneeded policy was to let it lapse, sell it back to the original insurer for its current net cash surrender value, or to exercise a non-forfeiture option. In a life settlement, the sale price is less than the policy’s face value, but is higher than the policy’s net cash surrender value. The price can range as low as 3% to as high as 30% of the face value of the policy (death benefit), but usually averages to about 15% of your policy’s face value. The value in the life settlement transaction is determined by a number of factors including: your age and medical condition, the type of insurance, the amount of premium payments, and the status of loans on the policy.
There are many reasons you may no longer need or desire a life policy:
• loss of a loved one
• need to pay for long term care or medical costs
• premiums have become unaffordable
• divorce
• beneficiaries no longer need the death benefit
• financial hardship
• your estate got smaller
• a key executive retired
• sale of a business
• loan repayment
• policy underperforming your expectations
• your level term life’s conversion period is expiring
• estate tax law revisions mean your heirs no longer face a hefty tax bill at your death
Who can qualify?
A potential candidate for a life settlement is typically aged 65 or older; has a life policy with a face amount of at least $250,000, and has a life expectancy greater than 2 years.
What type of policy can be sold?
Most types of life policies can qualify as long as they’ve been in existence for more than 2 years. However the most common are Universal Life, Whole Life, Variable Life, Survivorship Life, and convertible Term Life.
What happens to my policy?
A life settlement transfers ownership of your policy to a third party investor that only has a financial rather than an insurable interest in your life. In other words, the death benefit will eventually be paid to the new owner. Once you sell your policy you give up all rights and obligation to the investor in exchange for the sale price. The buyers are usually institutional investors such as pension funds, charitable endowments, universities, and hedge funds.
What can the money be used for?
You can spend the money on whatever you like. Some people use it to fund other investments, make charitable donations, fund a relative’s education, or even purchase replacement life insurance.
Actual Cases
From LISA, Life Settlement Association
Case 1: Policy seller: 70 Male
Policy type: 20 year term policy
Policy value: $1,000,000
Net Settlement paid to seller: $156,000 (15.60% of death benefit)
Case 2: Policy
seller: 69 Male
Policy type: Universal Life policy
Policy value: $500,000
Cash surrender value (CSV): $10,335 ( 4.01% of death benefit)
Net Settlement paid to seller: $210,000 (42% of death benefit)
Settlement vs. CSV ratio yield: 1047.6%
Case 3: Policy seller: 80 Female
Policy value: $2,000,000.00
Cash surrender value (CSV): $9,897.65 (0.49% death benefit)
Net Settlement paid to seller: $330,000.00 (16.50% of death benefit)
Settlement vs. CSV ratio yield: 3334.12%
What are the fees?
Be aware that the commissions on life settlements can be as high as 33%. These commissions are negotiated between the advisor and the purchasing company, but are not always disclosed to the client. Make sure your advisor clearly states their cut. More reasonable commissions hover around 8% of the sale price.
Other than commission there is no other fee. You can put your policy out for bids and decide whether or not you will accept a bid or turn it down. The whole process takes about 2 months.
Do I have to take a bid if I don't like it?
Never! There is absolutely never any obligation or fees if you don't want to accept the bids for your policy. It is free to put your life policy out for bid just to see what it's worth in the life settlement market.
What are the tax implications?
A life settlement is generally a taxable event.
• The portion of the policy owner’s investment (premiums paid) will be received tax-free.
• The difference between the premiums paid and the net cash surrender value will be taxed as ordinary income.
• The portion exceeding the net cash surrender value will be a gain, in most circumstances a capital gain.
Since every situation is different it is important that you consult with your tax advisor when contemplating selling your life insurance. Life settlement brokers are not tax consultants.
Important Considerations
Life settlements can be a wonderful source of funds. But they are not for everyone. You must consider whether you still have a need for continued coverage. If your premiums are too expensive you may be able to lower your amount of coverage and keep your current policy by exercising a non-forfeiture option. If after the life settlement, you plan to replace your existing policy with another policy there may not be any other availability or comparable coverage for less cost. You must assess your circumstances, including financial need, investment objectives, tax consequences, and other relevant implications of selling a policy.
Wendy Goldband, MSW, is a Registered Representative and Producer with an expertise in long term care planning. She is the former Senior Marketing Manager for Crump Services, the largest life brokerage in the nation. Author of Breaking Autism’s Barriers and Dangerous Encounters:Avoiding Perilous Situations with Autism, she also helps families with special needs plan their financial futures. If you have a specific question about your situation or would like more information call Wendy at 443-756-9281.
wgoldband@gmail.com. |
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