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tDoes my policy qualify for a life settlement?
| Almost all policy types qualify for a life settlement including Universal Life, Term (must be convertible), Whole Life, Survivorship, Adjustable, Variable Life, First to Die and Second to Die. The Policy can be owned by an individual or any entity including such as corporation or trust.
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How do I know if I qualify for a life settlement?
Typically any individual age 65 and over with a policy value of $250,000 or greater may qualify for a life settlement. The policy must be in force for a minimum of 2 years and must be assignable; however, most policies are assignable.
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In what situations would a life settlement become a valuable option to consider?
Common Personal Reasons:
- To buy replacement insurance coverage, if suitable
- To eliminate premium payments that become unaffordable
- The insured outlived the beneficiaries and policy is no longer needed
- Divorce require a re-allocation of assets or liquidation
- To use the settlement proceeds in other investment vehicles (i.e. annuities)
- To improve general quality of life
- Bankruptcy courts require a liquidation of asset
- To use the proceeds for benevolent contributions
- To eliminate debt, pay property taxes, payoff mortgages or to make mortgage payments and to pay other monthly bills.
Professional or Business Reasons:
- Liquidation or reorganization of the business assets
- “key man” policy is no longer needed or required by bank or partners
- Policy performing below expectation
- Buy/sell agreement dissolved and policy is no longer required
- Deferred compensation payout requires policy liquidation
- Company owned policies on key employees no longer needed
Estate Planning Reasons:
- Estate size (assets) fluctuates and current exemptions no longer require a policy to cover estate tax
- The cash could be better used for a variety of other financial planning purposes (i.e. to pay gift tax)
-To create liquidity within a trust for other cash flow needs
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If I should decide to sell my policy, will a medical exam be required?
A medical exam will not be required. Standard procedure will require you to sign a release so that copies of your medical records can be collected. These records will be used to determine how much the institutional buyers are willing to pay for your policy. Your medical records are protected confidential information that will only be shared with those authorized recipients involved in the viatical / life settlement.
(For more info on what other requirements are used to come up with a price (offer), see question
number 6 titled “How Large of a Settlement can I expect to receive for the sale of my policy?”)
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What are the most common uses for the life settlement proceeds?
The proceeds from a life settlement are not restricted in their use. Some of the common uses for the proceeds include:
- Purchase long-term care insurance
- Eliminate accrued debt
- Contributions to charity
- Invest in stocks, bonds or mutual funds
- Purchase “replacement” life insurance that is more applicable and use proceeds to eliminate or reduce future premium
- Purchase an annuity for a guaranteed an income stream
- Pay off debt
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How large of a settlement can I expect to receive for the sale of my policy?
There are many variables that must be evaluated by the potential buyers that will consider the purchase of a life insurance policy. These variables include: age of the insured, health status of insured, cost of the on going premiums, the type of policy, the financial rating of the issuing insurance company and, the timing of the sale based on market supply and demand.
A competitive negotiation and bidding process is also a key factor in the reflection of the final offer price. This role is typically performed by a licensed life settlement broker and more recently by using an electronic exchange or auction platform.
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What are the important points I should be considering when choosing a life settlement broker?
It is important to understand that the life settlement broker has a fiduciary duty to get the highest offer for your policy and is an intermediary between you and the purchasing institutions (providers) that will bid on your policy. Although they serve a very important role, many life settlement brokers do not offer a full disclosure policy to the client. To ensure your policy is receiving adequate representation in the open market, request that your broker shows each of the offers they receive for your policy from each provider.
Although Viatical / Life Settlements are regulated by many states, there are states that still do not regulate them. The life settlement industry is simply growing faster than regulation can keep up. The National Association of Insurance Commissioners (NAIC) has created the Viatical Settlements Model Act, which serves as a template of rules for each state to adopt. However, not all states have adopted the stringent viatical/life settlement laws fashioned after the NAIC model. Make sure you select a broker that has chosen to operate within the guidelines of your state's laws.
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What if I still require life insurance coverage?
| One needs to be cautious about selling your current policy if you have the need for insurance coverage. Although it can be possible to sell your current coverage and use the proceeds to purchase more applicable or less expensive coverage, obtaining new coverage will require you to meet the carrier's insurability requirement. Therefore, it is recommended that you secure an offer on your new coverage prior to selling your current policy.
Should you want to sell part of your coverage, you may be able to have the insurance carrier split the policy into two or more policies which would allow you to sell any number of policies. It is advised that you speak with an insurance professional prior to selling your policy to see if you can obtain new coverage.
Due to changes in insurance costs, it is often times possible for a policy owner to replace their current coverage with new coverage that has a lesser premium (provided health coverage hasn't changed significantly)This is because there has been a decrease in mortality costs and over the past 10 to 15 years and life insurance companies have become more competitive. Should you decide and/or qualify to buy replacement coverage, you may be able to reduce or eliminate future premiums by using the proceeds of your life settlement.
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What is the difference between a Viatical Settlement and a Life Settlement?
A viatical settlement is traditionally associated with an insured that is terminally ill. Terminally ill is typically defined as a life expectancy of 24 months or less depending upon your state's laws. Similar to a viatical transaction, a life Settlement involves the sale of an insurance policy; however the life expectancy of the insured in a life settlement is between 2 years and as many as 18 years. It is because the asset being sold in both transactions is the same that the two are often confused and even grouped as the same, when they are technically much different. They also often fall under entirely different regulatory statutes.
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How can I be assured that I am receiving the highest offer (price) for my insurance policy?
It is important to have an accurate evaluation of the market value of your policy before you release your policy to a viatical/life settlement broker or the market place of qualified buyers. After you obtain the estimated fair market value, it is then important to verify that your life settlement broker is receiving multiple offers from the large institutional buyers as this will lead to you obtaining the highest price for the sale of your policy. To accomplish this, always ask to be notified when a new offer is received and to request the amount of the offer.
A life insurance appraisal can be completed in a few minutes by answering a few basic questions about your policy, age and health. You will not be required to enter personal information. To begin your life insurance appraisal now click here.
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Who is responsible for paying the ongoing premiums if I sell my policy?
Once the policy is sold and a “Change of Ownership” form has been filed with the insurance company, the new owner will be required to pay the on going premiums to keep the policy in force. You will no longer be under any obligation or liability to pay the future premiums.
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What is the current tax treatment of life settlement proceeds?
Please know that we do not offer tax or financial advice and therefore recommend that you consult with your tax and financial professional regarding the tax implications of the sale of a life insurance policy. Life Settlement proceeds are usually treated as follows.
- Tax free up to the amount invested or the premiums paid to date (basis)
- Ordinary income tax is due on the amount up to the cash surrender value
Long term capital gains tax is due on the amount above the cash surrender value
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Can I reverse my decision to sell my policy after I have already received the settlement?
Your ability to reverse the life settlement after your policy has been sold and you have received the settlement proceeds may depend on the state in which you (the owner) is domiciled. Most states and buyers provide the seller up to 15 days to cancel the life settlement sales contract after receiving the proceeds. This timeframe is called a rescission period. If the seller decides not to sell their policy during the rescission period, the purchaser must return ownership rights of the policy when the sale proceeds are returned.
By law, some states allow up to 30 days for you to cancel the sale. The guidelines for the rescission period will be explained in detail in the Life Settlement Purchase & Sale Agreement (glossary), which can vary on a state-by-state basis. Make sure you have an advisor review the documents thoroughly as to not wave your rights to a rescission period.
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What if the insured dies immediately after the sale of the policy?
The results of this situation will depend upon the state regulations in which the policy owner is domiciled. Some state’s regulations dictate that the contract will automatically cancel and the original owner would receive
the life insurance proceeds if the insured were to pass away anytime up to the 15th day after the contract was finalized. The new owner will pay the original owner of the policy or beneficiaries designated by the original owner all proceeds it receives from death benefit, minus any money paid for the purchase of your policy and any premiums paid to the insurance company to keep your policy in force. The guidelines for this scenario will be explained in detail in the Life Settlement Purchase & Sale Agreement (glossary), which can vary on a state-by-state basis. Make sure you have an advisor review the documents thoroughly as to not wave your rights to a rescission period.
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