Don’t feel bad if you don’t know what a life insurance settlement is all about. Most people have never heard of the practice. Here is a simple explanation. If you are aged 65 or older you can sell an insurance policy you no longer need for more than the cash value of the policy through a sale called a life insurance settlement.
The life insurance settlement transaction has been available since 1995. The purchase of the policy will probably be made through an insurance settlement company for pension or institutional fund buyers.
Here are three common reasons why a person would enter into a life insurance settlement
1. The policy is no longer needed.
78% of all insurance is initially purchased for family protection. Families with children insure the breadwinner(s) to provide for the family, pay off a mortgage and educate the children.
Now you no longer need as much insurance. A life insurance settlement would bring in more cash than you would get from the insurance company that issued the policy if you cashed in the policy.
2. The policy has a large loan.
You have borrowed the maximum amount against the policy at some point in time but not repaid the loan.
Every year you ignored the bills for interest on the loan and let those amounts be added to the amount of the principle of the loan.
Over the years, the amount of the loan plus the interest can exceed the cash value of the insurance policy. At this point, the insurance company will inform you that unless you pay some staggering amount of money the policy will lapse. In addition to having no insurance, there will probably be some gain the insurance company is required to report to the IRS. You will be taxed on the gain and there will be no money in the policy to cover the amount of the tax. You will then need to pay the tax.
The best solution available might be a life insurance settlement. Once you sell the policy, the loan transfers to the buyer. The buyer will undoubtedly pay off the loan to keep the policy in effect.
The only downside is that not all policies with loans are candidates for a life insurance settlement. Settlement companies may not be willing to make an offer on a policy with too large a loan or may make an unacceptable offer.
3. The premium for your Universal Life policy has been affected by interest rates.
One of the major factors in determining the premium for a given face amount of Universal Life is the interest rate assumption made at the time you bought your policy. Due to the decline in interest rates in recent years, your original premium may not be sufficient to continue your policy.
One day you go to your mailbox and open your premium notice and the insurance company says that in order to keep the policy in force, you have to come up with more than you paid for your last car.
A life insurance settlement averts this problem as well.
Consider, if you will, a couple of actual examples:
A woman purchased a $1 million universal life policy many years ago. She is now 82 years old. The premium she has been paying for decades has not been enough to pay the required premium for some time. The difference has been deducted from the cash value of the policy, bringing it down to $17,800. Unless the woman can pay much higher premiums, the policy will lapse in two years.
Her estate plan requires she keep a lower amount of insurance in force. So she effected a life insurance settlement for $192,000 and bought a single premium paid up policy.
A man’s wife died several years ago. He no longer needed the $300,000 policy he has been carrying to protect against his premature death. He could have cashed it in, but it only had a cash value of $518. So he asked his agent to research a life insurance settlement and sold it for $53,000, paid off all his credit cards, went down to the dealership, plunked down cash for a new car and took a vacation.
Finally, consider a 65-year-old man with a ten-year term life insurance policy purchased when he was 55. The policy will expire in a few months. Despite the fact that a term policy has no cash value, he is able to negotiate a life insurance settlement for $8,400.
This final example is a reminder that even though a term life policy has not cash value it can still be sold in a life insurance settlement.
The bottom line is this: if you are age 65 or older and you have any kind of life insurance policy that is no longer needed or fits one of the examples I have described, you might do very well to take a good long look at a life insurance settlement.
Robert D. Cavanaugh, CLU is a 39-year veteran of the life insurance, financial and estate planning industry. He publishes The Smart Giver, a planned giving educational program which advances techniques to increase income and reduce taxes while simultaneously helping churches and non-profits. More information about how a life insurance settlement can apply to fundraising can be found on his blog.
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