While reverse mortgages are becoming increasingly popular, there is another venue by which senior citizens can have extra cash that may be much needed or wanted simply to enjoy. Are you age 65 or older? Do you have any health problems? Do you still own a life insurance policy that has not yet matured? If you answer yes to these three questions, you may be a good candidate for a life settlement.
In a nutshell, a life settlement is simply selling your life policy for a cash amount greater than its cash value but less than the death benefit or face amount. The particulars can get complex so if you seriously pursue settling your policy, you will need experienced advice. To help make your decision, let us look at some advantages of selling a policy:
- Immediate cash for needs or wants.
- No more premiums.
- Extra monthly cash on hand.
The disadvantages of selling a policy include:
- The settlement money is taxable.
- The cash can jeopardize eligibility for social services benefits, such as Medicaid.
- No tax-free death benefits for survivors.
- Future insurability can be jeopardized.
- Confidential information can be compromised.
- No control over policy ownership.
Life settlers look primarily for clients who are age 65 and older, have a life expectancy of 3 to 15 years and own a policy with a face amount of at least $250,000 to $1 million. As this industry grows it is expected to reach for smaller policies but at the moment, only large policies are generally sought. The basic rules to remember are:
- Sell a policy only if you no longer need or want it and do not anticipate needing life insurance in the future.
- Consider alternatives to selling, such as using your cash value to buy reduced, paid-up coverage or an extended term insurance. Your advisor should go over the alternatives with you.
- Compare the financial benefits of selling the policy with keeping it. Again, an experienced advisor has the tools to show you today’s value of future money so you can see if ‘holding’ or ‘folding’ is better for you.
- Sell only to institutional buyers. This will give you the best price because these companies compete with each other for policies to buy. In fact, they bid for them much like you bid for items on eBay.
If you decide to inquire about a life settlement, seek a life settlement broker or life settlement firm. The fewer people in the chain, the more money for you. If you decide to sell your policy, expect the whole process to take 3 – 6 weeks. At the very least, you will be expected to:
- Provide your medical records for analysis.
- Undergo at least one physical examination.
- Have your finances thoroughly examined.
In addition, you may be asked to certify that selling your policy is not going to bring later legal action. Too many life settlers have been sued by angry heirs claiming that the policy owner, “did not know what he was doing”. Because of this, your own mental competency will be the first thing to be certified.
In working with the broker or buyer, keep in mind:
- Insist on disclosure of the broker’s fees and all offers that are made.
- Insist on confidentiality. Your policy may be resold more than once and subsequent buyers do not need to know who you are or where you live.
- Pre-settlement expenses are part of the investment costs and the buyer should pay them.
- Once you sell the policy, the new owner pays the premiums. Also, once you have sold your policy, expect to be called periodically about your health.
The life settlement issue is simple in principle but can be complicated in practice. Still, you have nothing to lose and maybe a lot to gain by at least asking if a life settlement will work for you.