Life Settlements are relatively young transactions in the insurance industry, but you can trace its origins back to 1911. Supreme Court Justice Oliver Wendell Holmes noted in his opinion that “Life insurance possessed all of the ordinary characteristics of property, and therefore represented an asset that a policy owner may transfer without limitation.”
A Life Settlement represents the sale of a life insurance policy from the policy owner to a third party investor. The policy owner receives cash that is less than the policy’s Death Benefit while the investor continues premium payments until the death of the insured.
It’s hard to believe that the AIDS epidemic is now 30-years-old. In those days, many victims in need of cash sold their policies through a Viatical Settlement. In this situation the policy owner was certified as terminally ill, usually with a life expectancy of less than 24 months. Medical advancement in AIDS treatment along with Accelerated Death Benefit provisions in newer policies have diminished the appeal of Viaticals.
Life Settlements usually focus on insureds in the 65-and-up age bracket. This is an area of concern for older insureds, particularly those with Universal Life policies. Significantly lower interest rates have many of these policies on a track to implosion. The Wharton School of the University of Pennsylvania estimates that 88% of Universal Life policies never result in a claim.
Other than considering the sale of a policy that is running out of gas, there are several other scenarios that might warrant consideration of a sale:
– More cash than a policy surrender
– Coverage is no longer needed on a key employee.
– Business partnership has ended.
– Charitable gifting
– Estate taxes are no longer a liability.
If you do, in fact, have a solid offer, please note the taxation of Life Settlements. The IRS will tax as ordinary income the amount of cash value that exceeds premiums paid just like a cash surrender. In addition, there could also be long term capital gains tax if the balance of the settlement exceeds the cost of insurance.
The Financial Industry Regulatory Authority (FINRA) advises there are several factors to consider when deciding to sell your policy:
– If insurable, a Section 1035 Tax-Free Exchange may be more attractive.
– Review your existing policy for Accelerated Benefits for Critical and Chronic Illness.
– Are you being offered a fair price for your policy and is the settlements broker properly
– There could be financial consequences if you receive state or federal assistance.
– How long will you have to provide periodic health updates to the buyer of your policy?
– Confirm the transaction costs, as commissions can exceed 50% which is way too high.
– Avoid a high pressure offer and other aggressive sales efforts.
In summary, a Life Settlement can be a very attractive benefit to your retirement planning program. This is not a “one size fits all” program, so if you feel this might be worthwhile, meet with a trusted advisor who gives you complete information and full disclosure.
Mike Lassiter is a Chartered Life Underwriter and Chartered Financial Consultant. He is a Licensed Insurance Counselor and a Registered Investment Advisor. He can be reached at 770-786-2781.