Life seldom works out as you plan. You may have gone to college in Boston to become a lawyer and wound up running a restaurant in San Francisco. You may have thought you would never get married, but now are living in the suburbs with a family of four. If you bought a life insurance policy somewhere along the way, that policy may be worth a great deal of money today as an insurance settlement.
Life Settlement Providers
A life settlement provider may be able to help you convert your policy to cash. Life settlement providers are companies, or sometimes individuals, who operate in the secondary market for insurance. You should not confuse them with life insurance companies. They are in the business of aggregating and buying policies and do not have any fiduciary relationship with their clients.
In order to be able to sell your policy to a life settlement provider, and get the money you need, your policy must be attractive enough for the provider to want to make you an offer. When you qualify for a life settlement and decide to sell your policy, you are giving up ownership in the policy. In exchange for a lump sum payment, the life settlements provider becomes the sole beneficiary of the policy.
While the guidelines may be slightly different based on which life settlement provider you select, it is a fair statement to say that in order to qualify, you must have a major slippage in health which results in a fairly dramatic reduction of your life expectancy. It is not necessary for you to be terminally ill to qualify for a life settlement. Use the life settlement calculator to estimate the value of your life insurance policy as a life settlement or viatical.
Backgrounds and Life Insurance Settlement Providers
A life settlement provider will want to know some things about you and your life insurance policy. First of all, because your health is a major factor in determining the potential value of your policy, the provider may want to review all of your medical records, get reports from doctors and consult actuarial charts to determine your life expectancy. Second, the provider will want to know the amount of your death benefit and if there are any loans against the policy. Your policy needs to be valued before an offer can be made.
A person may have a number of different reasons for wanting to sell their policy. Assuming you meet the conditions to qualify for a life settlement, you may want to make a deal because you have high out of pocket medical costs due to your declining health. The money you receive could be applied to pay for home health care to help you with your basic needs such as bathing or preparing meals.
You can also use the proceeds from a life settlement to take a trip across the country to visit family before your condition deteriorates to the point where you can no longer travel. If you are 95 but still spry, you will likely qualify for a life settlement and then you can use the money to try to do everything on your bucket list.
When life circumstances change, having a life insurance policy can be a real blessing. Why not get your policy valued and see if a life settlement provider can help you?
Are There Any Taxes Associated with Life Insurance Settlements?
People investigating the opportunity offered by a life insurance settlement want to sell their insurance policy so they can monetize it. Some believe that since the investment vehicle is a life insurance policy it is exempt from taxes. This belief stems from beneficiaries of life insurance that a relative named as a beneficiary on the policy does not pay taxes on the payment from the insurance company.
Life Settlement Sales are Taxable
The rules are different though when a company or individual owns a life insurance policy through a life insurance settlement. In 2009, The United States Internal Revenue Service issued rules on when the proceeds of a life settlement are taxable.
Thanks to the 2009 issuance of rules, life insurance settlements for federal income tax purposes are the same across the country. However, each state, at the state level, handles taxation differently. For this reason, it is important that you arrange a conference with a qualified tax advisor to find out the state tax implications of selling your life insurance policy.
Content presented here is for information only and no one should rely on it or make a decision based on it. Life Settlement sales are complicated financial transactions. Seek the advice of a qualified life settlement tax advisor or your own finance advisor before concluding a sale.
History
The ability to enter in a life settlement agreement has been legal for over 100 years. It was almost a well-guarded secret, as insurance companies would rather pay the insured the cash surrender value of his or her life insurance policy rather than the full face value to an owner not related to the insured. This is a financial decision by the companies. By being silent about life settlements, they encouraged people to either abandon their policies or cash it in for face value only. This is good for an insurance company’s bottom line.
However, during the 1980s, viatical settlements started to become popular. While a viatical settlement is very similar to a life settlement, the sales were from young, terminally ill patients who usually needed the money for health care and end of life care. As the viatical market matured so did the life settlement industry.
Since life settlement transactions were rare, the Internal Revenue Service had no written policies on how to tax them. This lack of direction from the IRS continued for nearly a decade, until May of 2009 when the IRS issued IRS revenue ruling 2009-13 – life settlement taxation guidelines.
IRS Ruling 2009-13
There are two buckets of cash that interest the IRS when a sale of a life settlement occurs. First are capital gains. Second is ordinary income.
Ordinary Income Taxes
The ordinary income portion of the transaction is the cash surrender value of a life insurance policy – it is what the seller receives when surrendering the policy.
Capital Gains Taxes
The amount a seller receives from the life settlement broker less the surrender value is a capital gain under most circumstances. Even if it is a capital gain, the tax rate is usually lower than if treated as ordinary income.
Term Policies
Settlement proceeds up to the total premiums paid beyond the cost of insurance (COI) required to keep the policy in force is the basis. That amount tax-free. Monies paid out over the basis are a capital gain and taxed.
Universal Life Insurance and Whole Life Insurance Policies
These classes of policies have more complicated tax requirements. According to the 209 ruling calculating the basis is the same for these policies as it is for term policies. Settlements up to the amount of the cash surrender value (CSV) less premium payments great than cost of insurance is ordinary income and taxed as such.
Finally, life settlement proceeds that exceed the CSV are capital gains and taxed as such. For Universal Life and Whole Life policies, the taxation is more complex. The revenue ruling says that settlement proceeds up to the total premiums paid over and above the cost of insurance (COI) needed to keep the policy in force is considered basis and is tax free (same as a term policy). Settlement proceeds up to the cash surrender value (CSV) minus premium payments exceeding COI is ordinary and subject to ordinary income tax. Lastly, settlement proceeds above the CSV are capital gain and taxed using the capital gain formula.
Although when you sell your policy for cash, it is not as if you have gotten a tax free life insurance loan. There are tax implications.
The federal government has one set of rules for life insurance settlement taxes that work all over the United States, each state handles life settlement taxation differently. The federal rules need to be followed carefully, as do each state’s regulations making it a good idea to hire an expert in life settlement taxation to advise you.
What are the risk factors for life settlement investments?
Life settlements bring together a willing seller and a willing buyer. As the policy owner, or seller of the life insurance policy, you know exactly what you are getting. When you negotiate and agree to a settlement with the life settlement provider, you receive an agreed amount in the form of a single lump sum. As the buyer of the policy, a life settlement company is making an educated guess on the rate of return they will realize when the insured dies and they can collect the death benefit.
The rate of return on life settlement investments can be affected by a number of different variables. You should understand each of those risks before you make the decision to invest in life settlements.
The insured lives longer than expected
Calculating the life expectancy of any person is not an exact science. Despite the meticulous efforts that go into reviewing medical records, analyzing them, and translating the findings into a number representing how long a person has left to live, life expectancy is still only an estimate.
A chronically ill person could surprise everyone and live for 5 years more than predicted. He or she could be killed in a car accident and die sooner than predicted. A person with a bad heart could qualify for a life settlement and then, two years later, get a heart transplant and live for twenty more years. You just never know for sure how long someone will live.
When a person lives longer than they are supposed to live, that will lower the rate of return on a life settlement investment. Principal and interest are not returned to the investor until the insured dies and the death benefit is paid.
Death benefits held up in court
Although life settlements are carefully drawn up to prevent any disputes over the full payment of the death benefit, there is always the risk of litigation when it comes time for an insurance company to pay out the death benefit. Payment can be delayed. Legal costs to obtain the full death benefit can reduce the rate of return on this type of investment.
Higher premiums
One of the calculations that goes into the valuation of a policy is the amount of the number and dollar amount of the premiums the new owner will have to pay to keep the policy in force. In a non-guaranteed universal life policy, the life insurance company reserves the right to increase the premium up to the maximum amount shown in the policy. In practice, cost-of-insurance risks are very small.
Coping with the risk factors of life settlement investments
Performance of your investment can be affected by all of the above risk factors and many more. To help guard against those risks an investor should look for:
- An experienced manager with a history of delivering a solid ROI.
- Low expenses – High expenses can eat-away at your ROI.
- A portfolio of different types of policies issued by different insurance companies.
- A portfolio of policies diversified by face value and life expectancy.
- Periodic reports that show the fund’s performance and outlook.
- Expected returns based on reasonable assumptions and not on a best-case scenario. Be wary of someone who promises 100 percent returns in just two
years.
Comparing a Life Insurance Loan to a Viatical Settlement
If you can no longer afford the premium, don’t let the policy lapse. You must get your life insurance policy valued before you just throw it away. Seniors literally throw away Billions of dollars a year.. without ever knowing. Instead, explore your options before you make a decision you may regret. Comparing a Life Insurance Loan to a Viatical Settlement will help you make the smart decision for you and your family.
Life Insurance Loans
When you own a life insurance policy, you can borrow against the cash surrender value and use the money any way you see fit. In general, the longer you own the life insurance policy, the larger amount of money you will be able to borrow. A loan or life insurance advance is a good way for some individuals to get the money they need to pay for medical care or use in other ways while they are still alive.
You can elect to repay the life insurance loan and the accrued interest, or, upon your demise, the balance of the loan plus interest will be deducted from the death benefit. Your beneficiary will receive any remaining balance. If you choose to take a life insurance advance and not pay it back during your lifetime, you should make sure you have made alternate plans for your funeral expenses.
Viatical Settlements
In most states in the United States, laws are in place that allow terminally ill individuals to sell their life insurance policy to a third party viatical settlement company. The National Association of Insurance Commissioners 2009 Viatical Settlements Model Act serves as a guideline for the individual legislation and laws in each state that govern viatical settlements.
An individual with a life expectancy of two years or left can entertain offers from one or more viatical settlement companies and usually receive a greater cash settlement than if he or she took out a life insurance advance. In return for a cash payment, the settlement company continues to make the premium payments and becomes the beneficiary of the policy upon the death of the insured.
What is your best choice?
When comparing a life insurance loan to a viatical settlement, there are many similarities and a few differences. You do not incur any federal tax liability with either option and both methods provide the insured and his or her family with funds that can be used to help provide care.
When you opt for a loan, you can always pay it back. You can also choose to borrow only a portion of the surrender value. You are in control of the amount of how much money will be left to pay out to your beneficiary. With the settlement, you may receive a greater amount of cash, but you no longer own the policy. Once the deal is complete, you can not change your mind.
Why the life settlement industry may be your best source for cash?
Thanks in large part to the tremendous advances in medicine, people are living a lot longer today than they did back 50 or 100 years ago. According to the National Center for Health Statistics, a man born in 1930 had a life expectancy of 58.1 years and a woman born in 1930 could expect to live for 61.6 years. Men born in 1950 could be expected to live until age 65.6 and women to 71.1. In 2010, the expected life span of a man born in that year stood at 76.2 and, for a woman, at 81.1.
When you were younger and purchased a life insurance policy, you did so for a specific reason. Now that you are older, your circumstance are almost certainly different. Today, you may decide that you no longer have the need to maintain your life insurance coverage. It might be to your benefit to turn your policy into a lump sum of cash. Finding a provider in the life settlement industry can be your best option when you make the decision to relinquish ownership of your life insurance policy.
Deciding on Selling Your Life Insurance Policy for Cash
If you decide to relinquish ownership of your policy, there are several different approaches you might take. The least attractive of your options is to simply stop paying your premiums and let your policy lapse. When you do that, you may be giving up any value that has built up after years of paying your premiums. A second alternative is to take the cash surrender value of your policy. While better than letting your policy lapse, this option may not return much of the real value that is in your life insurance policy. That leads the third, and quite likely, the best option – a life settlement. You may even be able to sell your expiring term insurance for cash.
The life settlement industry is a relatively new industry that developed as a way of helping millions of people obtain more money from their life insurance policies than they could get by going directly to their insurance companies. When you qualify for a life settlement, you generally get well above the surrender value and somewhere less than the face value of your policy.
Life Settlement Industry History
Back in the early 1980’s, when the AIDS epidemic was taking many lives, patients were able to receive accelerated death benefits from their life insurance provider. Viatical settlements became available to policy owners who were terminally ill and had a life expectancy of less than 24 months. As medical knowledge and treatment of AIDS patients improved, so too did the life expectancy of these patients. While many of these patients still needed to access money from their insurance, they were not categorized as being terminal and could not qualify for a viatical settlement. Out of this need, the life settlement industry began in the secondary market for insurance.
It always is a smart idea to review your insurance needs as your life circumstances change over time. Getting a life insurance settlement does require you to meet certain benchmarks, but many people do qualify. In order to see if you qualify and can take advantage of a more generous offer to buy your life insurance policy, you should have your policy valued. If you do qualify, you are under no obligation to accept a life settlement offer and are free to proceed as you wish.
What Questions Should You Ask Before You Hire a Life Settlement Broker?
If you decide to use the services of a life settlement broker rather than going directly to a life settlement provider, you need to find one that can help get you the most money from your policy. The best company to sell your life insurance policy to is the one who will help you get the most for your policy.
What does a life settlement broker do?
You might say that a life settlement broker works in the opposite way of an independent insurance agent. While an independent agent helps you buy a life insurance policy, a life settlement broker helps you sell a life insurance policy. Both work to get the best deal for their client. Unlike an independent agent, who presents your application for insurance to multiple insurance companies, a life settlement broker presents your existing life insurance policy to multiple life settlement providers in the secondary market for insurance.
Is your broker licensed?
While the National Association of Insurance Commissioners (NAIC) was instrumental in developing the model for the regulation of life settlements, individual states control the licensing of life settlement brokers who do business in those states. Proper licensing and oversight helps assure a transaction follows proper procedures and complies with HIPPA and other medical privacy laws.
Many states are just now starting to pay close attention to the life settlement industry. Some of those states have a very easy application to obtain a life settlement broker’s license. Others, like Florida, Texas and Ohio, have very stringent licensing requirements. As a consumer, you have the right to ask to see a broker’s credentials. If a broker is unwilling or unable to show you that he or she is licensed in your state, that is a good reason to look for another broker.
Will your broker be transparent throughout the transaction?
A good life settlement broker will take plenty of time to educate you about the process of selling your policy in the secondary market for insurance. If you are confused or have unanswered questions, you should always be able to call your broker and get answers. Your broker should let you know the names of all of the interested buyers and also be willing to show you all written offers.
Watch out for a serious conflict of interest?
Just like many credit card issuers also own credit collection agencies, it is not unusual for a life settlement broker to have a close association with a specific life settlement provider. If your broker works in a separate office or division owned by the same company that owns the life settlement provider, that is a definite conflict of interest and may influence the amount of competitive offers you receive.
How is the fee calculated?
Your broker is paid on commission, but how the commission is calculated can vary. The most common life settlement fees include:
- Payment based on a percentage of the face value of the policy
- Payment based on a percentage of the settlement brokered
- Payment based on the value created (amount over the surrender value of the policy)
Your contractual agreement should clearly spell out the percentage of your broker’s commission as well as the basis for calculating the commission. Each method used to calculate your broker’s fee can ultimately make a difference in how much money you actually receive.
Can I Sell My Life Insurance Policy for Cash?
If you over age 65 and own life insurance policies that you no longer need you can sell your life insurance policy for cash. Even policies with no cash value but that have insurance face value may qualify for these programs.
In general, a buyer will purchase the policy for less than the face value of the amount of insurance the policy will pay at the time of death but more than the present cash value of the policy.
Although it has been legal to sell insurance policies for 100 years it was mostly insurance companies that would buy an unwanted life insurance policy. In essence, the insurance company you bought the policy from had a monopoly for buying the policy from you. That has changed and now there are companies called life settlement companies that give you cash for your life insurance policy. These arrangements are not life insurance loans. You give up all rights and obligations such as premium payments when you sell your policy.
There are two types of purchases of life insurance policies. One is a viatical settlement that by insured people who are terminally ill use and the other is the life settlement.
Viatical Settlement
People who have life insurance and become chronically or terminally ill can use a viatical settlement for getting cash for their life insurance policy. While a person may sell to whomever they wish, many insurance policies and several insurance carriers have provisions within existing policies that allow for an advance of your death benefits. If your situation is that your life expectancy is greater than six months and your life insurance policy has no cash value it is likely that a viatical settlement is your only financial option.
Viatical settlements, life settlements and senior settlements are all pretty much the same, except for taxes. Most states define “terminal” as two to four years. If your life expectancy is within your state’s definition of terminally ill, the proceeds of your settlement are usually non-taxed.
It is an excellent idea to use a tax advisor before finalizing a viatical or life settlement.
Once you have completed a viatical settlement you have no further responsibility with respect to your live insurance policy other than allowing the buyer to know you are still alive. The buyer pays all premiums and is responsible for all paperwork with the insurance company.
Life Settlement
There is not much difference between a viatical settlement and a life settlement except for tax implications. Senior settlements are another term used to denote life settlements.
Clearly, consulting with a professional is advisable before you finalize any agreement. He or she will help you to understand the tax implications of your life insurance sale and answer any questions before the transaction takes place.
Once you get payment and turn the policy over to the buyer, you have no further obligations concerning premiums or dealing with the insurance company.
Selling unwanted life insurance policies for cash is well worth exploring. If you’re wondering can I sell my life insurance policy you must get your life insurance policy valued before you just throw it away. Seniors literally throw away Billions of dollars a year.. without ever knowing.
Why have I not heard about life insurance settlements until now?
It is recent, but several states do now require that an insurance company make the consumer aware of potential options that may be available to them when they are contemplating the cancellation of their life insurance policy. Even in those few states, it is a somewhat watered down mention that does little to actually inform the consumer of how any of the secondary market options could truly benefit them. Prior to the advent of Life Insurance Settlements, a life insurance policy holder could essentially only surrender or take the maximum loan and then lapse their policy if they needed all of the cash value. Sure, there are several non forfeiture options, but if someone can no longer afford the premiums and needs all of the cash or no longer has the need for the insurance, it is typically surrender or lapse.
So Why have I not heard about life insurance settlements until now?
It is a fact that more than 80% of life insurance policies lapse or cancel without ever maturing by way of a death benefit. Most consumers and some agents are still completely unaware of how to unlock the hidden value in an unneeded or unaffordable life insurance policy. Some Broker Dealers and Insurance Companies still ‘strongly discourage’ or outright forbid agents to speak about viatical settlements or even mention Life Settlements or other secondary market solutions to their policy holders.
That creates an obvious moral dilemma for an adviser. How can you allow someone you advise to surrender a poor performing Universal Life policy for just the cash surrender value when you know that they may qualify for a lump sum of cash that could be 10X their cash value?
How can you allow someone to lapse a convertible term policy with no cash value? If you know they may be able to sell their life insurance policy for cash to meet the current expenses of long term care, why would you not teach them? There are many new options available too, like a life settlement loan or a medicaid life settlement. A medicaid life settlement may be a great option if you need to pay for care like long term care, assisted living , nursing care, hospice or home care.
How Does a Life Settlement Work?
How does a life settlement work? A Life Settlement could be your solution to rising or burdensome premiums on life insurance you no longer need. Unfortunately, uninformed seniors surrender life insurance policies every day, without ever realizing that they could have received more than double their surrender value by simply utilizing a life settlement.
All but about 5 states now have a Life Settlement regulation and life settlement licensing requirements. Several states led by Washington, now mandate that insurance agents inform their clients of the life settlement option. The fact that there are states that now require their residents be advised of this option by their Insurance Company, speaks volumes around how mainstream Life Settlements have truly become.
This creates a major conundrum for some insurance agents whose insurance companies ‘strongly discourage’ their disclosing a life settlement option to surrendering policy holders. And with more and more people asking “How Does a Life Settlement work?” Your insurance agent should never have to choose between their fiduciary responsibility to you and a conflicting company policy, but that is exactly the situation that some captive agents feel that they now face. Many new options are gaining traction, depending on your specific situation and needs. A loan on your life insurance is the newest option available, followed by a medicaid life settlement and viatical settlements. You should know the value of your life insurance policy, so we have made it easy to get a life settlement estimate with our life settlement calculator. Our life settlement calculator will provide you a very general range of the value in your life insurance policy as a life settlement, without having to give up personal contact information.
There are various estimates, but it is pretty safe to state that more than 80% of life insurance policies never pay a death benefit. Somewhere along the way people either lapse their insurance policy, borrow all of the money out or simply surrender their policy for any cash value that is available.
Cash value life insurance such as Universal Life was often sold with long term projections and illustrations of 8% and up. When interest rates went down, interest sensitive insurance policies could not perform to those expectations. Considering that the amount of insurance you pay for each month within these plans is often related to how well the cash portion is performing; it can have a very severe impact on the ability of the policy to make it to maturity, without escalating your premiums.
If you are paying for term insurance or just the cost of insurance inside of a permanent plan, you have certainly noticed by now how dramatically the cost of insurance can increase in the later years of your life. Some people have been forced to lapse their insurance due to rising premiums. You need to understand that there is now a life settlement option, if you qualify, to get more than the promise of zero.
“Fun is like life insurance; the older you get, the more it costs.”
-Kin Huddard
Before you surrender or lapse your life insurance policy, take the time to have your life insurance policy appraised, then research and explore all of your options. If you are over 65 years of age, a life settlement could be the solution for which you have been looking, but you still need to do your homework.
Life Settlements allow you to harvest some of the intrinsic value that you have accumulated in your insurance policy… by living. With a life settlement, even your unneeded term insurance policy and your insurance policies with no cash surrender value may now actually hold value… to you.
You should start with a life settlement appraisal, much of the hidden value may not be liquid as in your home. No two life settlements are the same and it is always good to have a starting price point.