Life Policy Owners

Why Sell?

Like any personal property, your life insurance can be sold through a life settlement.

What is a life settlement?

A life settlement is the sale by the owner of a life insurance policy to a third party for an amount greater than its cash surrender value and less than the death benefit. The seller of the policy receives a cash payment. The buyer of the policy assumes all future premiums payments and receives the death benefit upon the passing of the insured.


Watch the video below to a learn a little more about your money and your life insurance.

Consumer-Awareness-Small


Each year more than $100 billion face value of life insurance lapses by seniors over the age of 65 – mostly from a lack of knowledge that an unneeded or unaffordable policy may be sold.


There are numerous reasons to consider selling a life policy:

  • The premiums are no longer affordable

  • The need to replace lost income in case of death of the insured no longer exists

  • The need for funds to pay estate taxes no longer applies

  • There is a need for resources to pay for health expenses and long term care

  • A term policy may be reaching the end of the coverage period

  • Funds are wanted to improve a retirement lifestyle

The sale of a life policy is not for everyone. 
There are alternatives other than selling a policy that may be appropriate for a policy owner’s circumstances:

  • Keep the policy inforce through a loan or use of the cash surrender value

  • Seek an accelerated death benefit, if available

  • Assign the policy as a gift or charitable contribution

  • Covert a term policy to permanent insurance

  • Reduce the death benefit with a lower face value and lesser premiums

  • Lapse or surrender the policy

Important:

Anyone considering a life settlement should first talk with their insurance, financial and/or legal advisor to explore all legal, tax and other consequences from selling their policy. 

 

Do I qualify?

In general, the following qualification criteria applies:

Age and health status of insured:

Seniors who are age 65 years or older. Younger insureds may qualify, depending on certain medical conditions.


Type of insurance policy:

LISA members can help you with every type of insurance policy, including term insurance.  However the majority of policies sold in the secondary market for life insurance are universal life insurance policies. 

The life insurance policy premiums:

The amount of the premium payments to keep the policy in-force will also play a role on the offer amount. 


Life insurance policy death benefit (face value):  

Life insurance policies with death benefits of more than $100,000 are most desirable. However, some smaller policies can be sold.    

Consumer Tips:

Policies may be owned individually or through a corporation, foundation, trust, non-profit organization or business. It is also very important that all beneficiaries understand the process, agree to the sale and are actively involved in the sales process.
 

How much can I get?

Selling your life insurance policy

When you sell your insurance policy, you receive a cash payment.  The buyer pays all future premiums and receives the death benefit when the policy matures (when the insured dies). 

Every case is different. The amount you receive will depend on:

  1. The death benefit/value of the policy – amount investor receives at the death of the insured
  2. The annual premiums – the amount of premiums that will be paid until the insured dies
  3. The number of years premiums will need to be paid – the remaining expected life of the insured
  4. The rate of return the buyer of the policy requires to make the investment

The amount received from a policy is a mathematical determination that takes into account the impact that each of the factors has on the value.  The higher the premiums, the longer the life expectancy and the higher the required investor’s return, the lower the value of the policy. Conversely, the lower the premiums, the shorter the life expectancy and the lower the investor’s required return, the higher the value of the policy.  


The amount received from selling a policy will always be greater than the cash surrender value and less than the death benefit value.

 

Cash Meter Example

“Americans who sold their unwanted life insurance policies, collectively received more than four times the amount they would have received had they surrendered them to their life insurance companies.”
London Business School Study, 2014

“US policy owners received 4-8 times more than the policy cash surrender values from life settlements from 2006-2009."
US Government Accountability Office (GAO) Study, 2010

Consumer Tip:

Life settlement transactions are complex. Anyone considering a life settlement should first talk with his or her insurance, financial and legal advisors and work with members of the Life Insurance Settlement Association.

Selecting an Advisor

selecting-a-life-settlement-advisor-to-sell-your-unwanted-life-insurance-policy
Understanding the parties involved 

When a policy owner decides to explore whether selling a life insurance policy is a good option for their unique circumstances, the owner or his/her financial advisor should start the process by contacting a member of the Life Insurance Settlement Association who is either a life settlement broker or provider.

Consumer Advisors:

  • Life settlements can be complex financial transactions and are generally conducted on behalf of clients by experienced professional advisors.
  • When representing a client, financial professionals have a duty to represent the best interests of that client.
  • Compensation for service can be paid by fee or, if licensed, by commission.
  • Financial professionals recognize that life settlement regulation varies by state. It is important to know which laws and regulations – if any – apply in your state.

It’s possible to sell your policy through a Life Settlement Broker or Provider

Life Settlement Brokers:

  • Connects the sellers of an insurance policy with buyers.
  • They represent the policy owner and negotiate the offer that best serves the needs of the seller, which may be accepted or rejected by the policy owner.
  • They owe a fiduciary duty to the policy owner.
  • A Broker does not include an attorney, certified public accountant or financial planner retained in the type of practice customarily performed in their professional capacity to represent the owner whose compensation is not paid directly or indirectly by the Provider.

Life Settlement Provider: 

  • Specializes in purchasing life insurance policies in the life settlement market.
  • Providers normally raise capital from institutional investors.
  • Working directly with a provider may eliminate intermediaries and expedite the transaction.  
Sales Process

Understanding the process of selling your unwanted life insurance policy

Each individual scenario could be different based on the parameters of the transaction. 

Life Settlement Process Explained       Life Settlement Application Signed

Step 1 | Discovery:

Policy owner realizes that his/her life insurance policy is an asset that can be sold. 

Step 2 | Representation:

If a life settlement is determined to be the best option, the policy owner or the advisor contacts a member of the Life Insurance Settlement Association who is either a life settlement broker or provider to begin the process. It's possible to engage in a life settlement through both. 

Step 3 | Application:

After choosing proper representation to settle a policy, the policy owner must fill out an application and provide policy, ownership and insured information including a list of physicians and/or medical records for underwriting. It is crucial that you discuss all your privacy and security rights.
 

Step 4 | Underwriting:

The settlement company submits the medical records for review by an independent life expectancy company. Life expectancy companies calculate the probable life expectancy using actuarial and physician experts.
 

Step 5 | Analysis:

Each life settlement provider/buyer calculates the market value for the policy presented for sale. Companies may consider different factors when valuing a policy, including contract specifics such as premium expense, death benefit and carrier ratings, as well as insured information such as age and life expectancy underwriting.
 

Step 6 | Offer:

The provider/buyer will either decline or extend an offer to the policy owner or broker. A broker will seek competing offers from other providers/buyers. The policy owner can accept or decline any offer.

Step 7 | Purchase and Sale Agreement:

If the policy owner accepts an offer, the provider that made the offer will prepare a purchase and sale agreement and other documents formalizing the transaction. The policy owner, insured and beneficiaries then sign this package. The provider will review, complete due diligence and countersign the package. The funds for the settlement transaction are then placed in an escrow account.
 

Step 8 | Notification:

The insurance carrier is notified of the change of policy ownership and beneficiary to the new owner, the provider.

Step 9 | Funds Transfer:

Upon written verification of the change of ownership and beneficiary, the escrow agent releases the settlement payment to the seller of the policy.


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  • Investopedia
Let's say you have a cash value or convertible term life insurance policy, but you really need the money now. Or, maybe you're finding it hard to keep paying the premiums.

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Let's say you have a cash value or convertible term life insurance policy, but you really need the money now. Or, maybe you're finding it hard to keep paying the premiums.

Instead of just surrendering your policy to the insurance company for its current cash value, there's a way to get a better profit. You can sell your cash value or convertible term life insurance policy to a life settlement company.

Life settlements are rapidly gaining steam as a means of retirement funding. Older policyholders (usually age 65 and up) can trade in their policies for a lump sum of money that can be used to pay for retirement expenses such as long-term care.

What Is a Life Settlement?

Today's life settlements are descendants of the old viatical industry, in which an investment company would purchase the life insurance policy of a terminally ill person so that he or she could get money immediately to pay medical bills. But viatical settlements were largely unregulated and there was a great deal of fraud and abuse.

Current life settlements are much faster, more convenient and structured, and policy owners no longer have to be terminally ill in order to cash them in. They are an ideal way for policyholders who either no longer need life insurance coverage or can no longer afford to pay the premiums to surrender their policies and get the most bang for their buck. 

The National Association of Insurance Commissioners Long-term Care subgroup released a report last year that listed life settlements as one of three main options for paying long-term care expenses, along with long-term care insurance and hybrid life insurance products that have accelerated benefit riders.

Life settlements now also allow for a partial policy surrender, where the policy owner retains some of the death benefit for a lesser amount of money. The amount of money that is received is based on the amount of the policy death benefit, the premiums already paid, the number of remaining premiums that have to be paid and the rate of return that the buyer will need to receive in order to purchase the policy. This amount will be less than the full death benefit, but more than the cash value – usually considerably more. Policies with higher premiums whose owners have a projected long life span are worth less than cheaper policies where the holder’s life span is projected to be shorter.

What's more, technology has made the whole process much faster. Felix Steinmeyer, cofounder and CEO of Mason Finance, a financial planning firm that specializes in life settlements, says, “It is now possible for customers to get an instant quote on what their policies are worth with the touch of a button. They used to have to supply reams of data and then wait for months to get this.”

Tax Treatment

The 2017 Tax Cuts and Jobs Act contains a clause that changed how the IRS calculates the taxable basis in life settlement transactions. The new law overturns IRS Rule 2009-13, enacted in 2009. This former rule required policyholders to reduce their tax basis by the “cost of insurance” charges that were paid over the life of the policy. This made it extremely difficult for sellers to accurately determine their basis, because many insurers could not or would not disclose this information.

The new rule mandates that life settlements will now be taxed using the same rules that apply when a policy is surrendered. The amount of premium that is recouped from the sale is treated as a tax-free return of principal. Any additional amount of money received from the sale up to the amount of the policy’s cash surrender value is treated as ordinary income, and any proceeds above that are usually taxed as capital gains.

The Bottom Line

A life settlement is an attractive alternative to surrendering or letting a policy lapse that is no longer needed or has become too expensive. A study by the U.S. Government Accountability Office (GAO) indicates that the average consumer received four to seven times more from a life settlement than he or she would have gotten by surrendering a policy. Consult your financial advisor for more information on these transactions and to find out whether you qualify.



Read more: How Life Insurance Settlements Can Help Retirement | Investopedia https://www.investopedia.com/articles/financial-advisor/082416/life-insurance-settlements-whats-new.asp#ixzz5F7dXfJkl 
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