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.
What are Life Insurance Settlements?
Your Old Life Insurance Policy May Hold Hidden Value as a Life Settlement
Most people, especially seniors assume that if they own a life insurance policy that they no longer need or want they have but two choices concerning the disposition of the policy.
- They can cash it in for the value of the policy’s cash surrender value, or
- They can let is lapse
These folks do not know about a third option, known as the Life Settlement option. Because the public is so poorly educated as to the benefits of the Life Settlement option, seniors are leaving loads of cash on the table when resolving what to do with unwanted or unneeded insurance policies.
What Is a Life Insurance Settlement?
Life insurance settlements or life settlements is a way for a person who owns a life insurance policy to monetize the policy for his or her use before they die. The insured sells the insurance policy to a life settlements company. The life settlement companies pay the insured more than the cash value of the insurance policy but less than the face value. When you sell your life insurance policy for cash, the seller gets immediate liquidity from an asset that was non-performing. The amount of money received is greater than if the insured cashes in the policy to the insurance company. Since the life insurance settlement option is not well known nor publicized, seniors mistakenly cash out policies leaving money they could have with a life insurance settlement behind.
In order to enter into life insurance settlements the seller must be over the age of 65.
Once the transaction is complete, the insured has nothing further to do with the insurance policy. The buyer makes the premium payments, and when the insured dies collects the death benefit.
What Determines the Life Settlement Value to the Seller?
Determination of the value of the policy to the seller is simply the highest price a buyer will pay for the policy. The primary evaluation tool used by the buyer is the Medical Evaluation (ME). The medical evaluation is a careful look at the medical records of the insured going back three to five years. A medical person reviews all medical records including hospital records, doctor’s office notes, lab results, and results of other diagnostic exams.
Based on this information, the life settlement company can make an educated guess as to how long the wait is to collect on the policy. This information determines how much more they will need to invest in it by paying premiums. If a medical evaluation determines that the seller has a year to live, he will receive a better payout than someone will with a similar policy that has an ME that estimates his remaining time to be three years to live.
In any event, the seller’s net gain is the face value of the insurance policy less the amount of the purchase price and the premium expense until the
policy pays out to the buyer.
“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.”
How to Find Your Life Insurance Policy Value
Most people, especially seniors assume that if they own a life insurance policy that they no longer need or want they have but two choices concerning the disposition of the policy.
- They can cash it in for the value of the policy’s cash surrender value, or
- They can let is lapse
These folks do not know about a third option, known as the Life Settlement option. Your life insurance policy value may be much more than you think. Because the public is so poorly educated as to the benefits of the Life Settlement option, seniors are leaving loads of cash on the table when resolving what to do with unwanted insurance policies.
What Is a Life Insurance Settlement?
Life insurance settlements or life settlements is a way for a person who owns a life insurance policy to monetize the policy for his or her use before they die. The insured sells the insurance policy to a life settlements company. The life settlement companies pay the insured more than the cash value of the insurance policy but less than the face value. The seller gets immediate liquidity from an asset that was non-performing. The amount of money received is greater than if the insured cashes in the policy to the insurance company and will vary from person to person as shown in these viatical life settlement case studies. Since the life insurance settlement option is not well known nor publicized, seniors mistakenly cash out policies leaving money they could have with a life insurance settlement behind.
In order to enter into life insurance settlements the seller must be over the age of 65.
Once the transaction is complete, the insured has nothing further to do with the insurance policy. The buyer makes the premium payments, and when the insured dies collects the death benefit.
What Determines the Value to the Seller?
Determination of the value of the policy to the seller is simply the highest price a buyer will pay for the policy. The primary evaluation tool used by the buyer is the Medical Evaluation (ME). The medical evaluation is a careful look at the medical records of the insured going back three to five years. A medical person reviews all medical records including hospital records, doctor’s office notes, lab results, and results of other diagnostic exams.
Based on this information, the life settlement company can make an educated guess as to how long the wait is to collect on the policy. This information determines how much more they will need to invest in it by paying premiums. If a medical evaluation determines that the seller has a year to live, he will receive a better payout than someone will with a similar policy that has an ME that estimates his remaining time to be three years to live.
In any event, the seller’s net gain is the face value of the insurance policy less the amount of the purchase price and the premium expense until the policy pays out to the buyer.
“You must get your life insurance policy value before you just throw it away. Seniors literally throw away billions of dollars a year.. without ever knowing.”
How Does a Life Settlement Calculator Work?
A life settlement calculator is a valuable tool that can give the owner of a life insurance policy a good estimate of how much their policy is worth. Many people do not know the value of their life insurance policy. If you are one of those people and let your policy lapse, you may be giving up a substantial sum of money that you could receive through a life settlement in the secondary market for insurance.
The Value of Knowing Your Estimated Life Settlement Value
You should not assume that just because your policy has no cash surrender value that it is worthless. If you paid premiums for 30 years, shouldn’t that be worth something? Well, your life insurance company might say no to you, but don’t give up. A company that provides life settlements in the secondary market for insurance might say yes. Life insurance is property and if you qualify, it can be sold for cash.
A life settlement calculator can help you find out if you might qualify to receive a lump sum cash payout for your insurance policy. When you qualify, the amount you can expect to receive will be more than the surrender value (if any) of your policy and less than the face value or death benefit of the policy.
In order to answer the question of whether or not you can receive a life settlement and the question of how much you might receive, your policy has to be valued. It only takes a minute or two in front of your computer to use a life settlement calculator and see if there is hidden value inside of your life insurance policy.
What does a life settlement calculator do?
One thing you do not have to worry about when you use the calculator is getting bombarded with calls or solicitations from companies who want to buy your policy. You are not asked to provide your name, address, phone number or any other personal contact information. The calculator is designed to educate and inform you and not to sell you anything.
Slightly personal information that you do need to supply is your age, gender and state of residence. Your age and gender are required because they help determine your life expectancy. You need to indicate your state of residency because life settlement rules are governed by state and federal law.
Information that pertains to the policy you own is necessary to value your policy and determine the amount of money that you may receive. The most important piece of information concerns your health. Are you having some medical problems or are you terminally ill? You will be asked to provide the name of your insurance company and whether you are the only owner of the policy. After indicating the face value of the policy and any loan that you may have taken out against the policy, you will fill in the box to indicate the amount of your annual premium. If you have a cash surrender value, that number needs to be entered as well. There are a few other simple questions to complete the form and then you press the button to get your answer.
Assuming you qualify for a life settlement, you will be shown a lower and upper limit of the value of your policy based on the information you provided. Also, you will see a number representing the different companies that are interested in making you an offer for your life insurance policy.
Remember, the life settlement calculator only provides an estimate and is not a guarantee of what you will get if you proceed with the process. If you would like to move forward, the next step is to contact a representative of the life settlement company, ask all of the questions you may have, and go over all of the details of such a transaction.
What are Life Settlement Investment Funds?
Life Insurance Investment Funds
Life settlement investment funds consist of a number of life insurance policies that have been purchased from life insurance policy owners. By pooling together a number of settled policies, the fund attempts to earn a risk-adjusted return for the investors in the fund. Each policy within the fund may generate a different rate of return, but the fund’s performance is measured by the collective returns of all policies within the fund.
In essence, a fund of life settlements provides diversity and reduces the risk of ownership compared to owning a single life settlement. While one investment within the fund might under perform expectations, another might do better than expected.
Unlike Annuities and Structured Settlements
Unlike an annuity, where an investor is guaranteed a specific rate of return, there are no guarantees on whether or not investing in a pool of life settlements will generate a specific return on investment. While you can limit risk and increase the probability of earning a solid return, it is possible for an investor to also lose some or all of their investment.
Life settlement funds can be an excellent way to diversify a portfolio of investments. There is a very low correlation with the returns that you may receive by investing in other asset classes. How the stock market performs may affect the price of gold, but has no effect on the performance of a life settlement fund.
Unlike a Fidelity growth fund, Vanguard Index fund, or any other mutual fund that is a common investment option for individuals, institutional investors are the prime buyers of life settlement investment funds. These funds are sold in the secondary market for insurance. Large institutions use these alternative investments to try to boost the performance of their portfolios and also to reduce overall investment risk.
A life settlement fund is only as good as the life settlements contained within the fund. It is up to the fund manager to accumulate the best possible portfolio of settled life insurance policies to reach the objective of the fund. There is always a trade-off between risk and reward in any type of investment and life settlements are no different.
If the fund pays too high a price to purchase life settlements or if the insured, who sold the policy, lives well beyond expectations, that can negatively affect the total return an investor would see on the life settlement fund. Therefore, one of the key components to running a successful fund is to make sure each life settlement that is purchased for the fund is properly valued.
A fund that contains policies where the average life expectancy of each insured is 3 years can provide a more certain rate of return (usually a lower percentage) than one that consists of policies where the average life expectancy for the insured is 7 years. It is also true that the potential rate of return on a fund with policies that have a longer life expectancy will be higher and carry a greater investment risk.
Life settlement investment funds may often outperform the stock market or other types of investments, but investors should be aware of the risks associated with such funds. Investing in this type of alternate asset class requires a great deal of due diligence. Perhaps that is the reason why this investment is more suitable for someone like Warren Buffet (Berkshire Hathaway) rather than Joe from Ohio?
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.