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 transaction is called a life insurance settlement and has been available since 1995. While an insurance settlement company facilitates the purchase, the buyers typically are pension and institutional funds.

Here are three common reasons why a person would enter into a life insurance settlement

1. The policy has outlived its usefulness.

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.

Unless you pay the interest on the loan each year, the interest is added to the amount you actually borrowed.

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.

If this happens, you get a call one day to tell you that if you want to keep the policy you have to pay the difference in the premium amount. This will be some outrageous amount of money.

A life insurance settlement averts this problem as well.

Here are a few real examples.

A woman bought a universal life policy for a million dollars bought many years ago. She is now age 82. For a number of years, the premium she has been paying has not been sufficient to pay the required premium so the difference has been taken from the cash value, which is now down to $17,800. Unless the woman is willing to pay substantially higher premiums, the policy will lapse in a year or two.

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 mans wife died several years ago. As a result he no longer needs the $300,000 policy he has carried on his own life. He could cash it in for its cash value of $518. After investigating a life insurance settlement, he discovered he could sell his policy for $53,000. He sold it, paid off all of his bills, bought a new car, and took a fabulous vacation.

Finally, let’s look at a 65-year-old man who has a 10 year term policy that he bought when he was 55. In a couple months, it will expire. Even though term insurance has no cash value, he was able to sell it for $8,400.

Don’t rule out term insurance policies as candidates for a life insurance settlement. You may be surprised at the offer that is made on a policy that has no surrender value.

So if you are age 65 or older and have a life insurance policy that has outlived its purpose or has one of the problems I have described, you may want to 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 strategies to increase income and reduce taxes while simultaneously helping churches and non-profits. Additional information about how a life insurance settlement can apply to fundraising can be found on his blog.

Tagged with: • • • • • • • • • •

Filed under: Life Insurance

Like this post? Subscribe to my RSS feed and get loads more!