There's a new game in town and it could mean a lot of money in your pocket. While life settlements have been around awhile, few people are aware of this opportunity. The life settlement industry is beginning to flourish, much to the chagrin of the life insurance industry.
Selling vs Surrendering
Under a life settlement agreement, instead of surrendering your life insurance policy for its cash value, you sell your policy to a third-party organization that buys existing policies, paying the premiums until the insured dies and then collecting the death benefits. Under the typical scenario, the insured must be age 65 or older, not in perfect health with a life policy of at least a $500,000 death benefit. These thirdparty intermediaries often include insurance agents, financial planners, stock brokers, CPAs, and attorneys. These third-party organizations are looking for someone who is not likely to live to normal life expectancy to ensure a good return on their investment.
Why would people surrender or sell their life insurance policy if they are not in good health? In many cases, the insured can no longer afford the premiums. In other cases, the need for life insurance no longer exists. Often the insured needs the cash value to help support their retirement.
Choosing a Buyer
How much the policy is worth depends on your age and health. The life settlement company will analyze your particular case and make you an offer. This is somewhat of a subjective process, so offers from different companies could vary significantly. Therefore, you should get a quote from several companies. It is important to note that some term life policies qualify for life settlement, so be sure to check before you surrender one. Proceeds from a life settlement agreement are subject to ordinary income taxes.
The life insurance industry is opposed to the life settlement business because they count on a certain level of policies terminated before the insured dies. In these cases, the insurance company collected premiums for years and ultimately never had to pay a death claim. The growing life settlement industry is wreaking havoc on the traditional lapse rates, which increasingly squeeze insurance company profits. Some insurance companies have decided to offer life settlement plans of their own. By going through your own company, you might reduce commissions and fees. Stewart H.Welch III, CFPÂ®, AEP, is the founder of the Welch Group, LLC, which specializes in providing fee-only wealth management services to affluent retirees and health care professionals throughout the United States. He is the coauthor of J.K. Lasserâ€™s New Rules for Estate and Tax Planning (Wiley; 2005). He welcomes questions or comments at 800-709-7100 or visit www.welchgroup.com. This article was reprinted with permission from the Birmingham Post-Herald.