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.”
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.
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 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.
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?