What are my Life Insurance Options?

What if i don’t need Life Insurance anymore?

Life insurance used to be a contract strictly between an individual and an insurance company. You paid your premiums. Your beneficiaries were paid a lump sum when you died. If you felt you no longer needed the life insurance or the premium was no longer affordable, you had just three options. You either continued to pay the premiums, gave up all value on a term policy or settled for the “cash value”. Now you may have a fourth alternative called a life settlement. In certain circumstances, your policy may have significant value to independent investors and you may have an asset that you never realized was there.

About Life Settlements

A life settlement transaction involves selling a life insurance policy that’s no longer wanted or needed to a third party – a person or business other than the insurance company that issued the policy — typically for more than the policy’s cash surrender value but less than its net death benefit.

Generally, the purchasers of life insurance policies are institutions called life settlement companies. They may hold the policies to maturity (that is, the death of the insured person) and collect the net death benefits, or they may resell the policies, or they may sell interests in multiple policies to hedge funds or other investors. The person selling his or her policy receives a lump sum payment. The amount of that payment will depend on a range of factors including his or her age, health and the terms and conditions of the life insurance policy. The purchaser agrees to pay any additional premiums required to keep the policy in effect and receives the death benefit when the investor dies.

What type of policies?

What are the most likely situations when a life settlement could make sense for a consumer?  First, the face amount of your policy should be $250,000 or more.

Many term life insurance policies provide a right to convert the coverage to permanent life insurance for an additional premium. While you might not need life insurance coverage beyond the original term, it may have long term value, depending on your life expectancy. If you have encountered an adverse health condition since the time you purchased the original policy, it is even more likely to be the case.

Some older policies may have had a very slow increase in cash value. However, unlike term insurance, you have the right to keep it in force as long as you pay the annual premium. Again, an independent investor may calculate that it is worth paying an owner more than the insurance company’s scheduled cash value plus continue to pay the premiums.

Certain businesses may have purchased “key man” insurance to provide financial assistance to a business in the event of the death of an important executive. However, circumstances may have changed as the company management expanded or the executive prepared to retire.

How it works

You contact an insurance agency who has a relationship with the specialized brokers. You will need to provide information on the specific policy form and current financial status of the policy. You will also be asked to provide basic information on your health. A preliminary estimate can be provided in a few days. If it looks like it is worth pursuing, more detailed information will need to be compiled and you will have to release your medical records but you will not be asked to take a physical. Once the information package is complete, the specialty insurance broker can solicit firm quotes.

The Financial Industry Regulatory Authority (FINRA) recommends these five factors to consider before agreeing to a life settlement include:

• Ongoing
  Life Insurance Needs. If you’re considering buying a new policy with the proceeds of the life settlement, you will need to determine whether you can get a new policy – and at what cost. Once sold, the old policy will still be in force and may affect your ability to get additional coverage.
• Determining
  a Fair Price. The best way to make sure you’re getting a fair price is to shop around — by contacting multiple life settlement companies yourself or using a licensed life settlement broker who will shop your policy around on your behalf.
• Financial
  Impact. The lump sum payment you receive can be taxable, depending on your circumstances. If you currently receive state or federal public assistance such as Medicaid, a life settlement can negatively impact your ability to participate in those programs.
• Transaction Costs. Commissions paid by life settlement companies to life settlement brokers and other financial professionals involved in the transaction can be as high as 30 percent. Ask your broker or other financial advisor how they are being compensated and what other parties are receiving commissions.
• Privacy Concerns. When you sell your life insurance policy, you will have to authorize the release of medical and other personal information so the buyer can determine how much to offer for your policy. Before accepting any offer from a life settlement company, make sure it has procedures in place to protect the confidentiality of your information.

How should I think about this?

First, focus on the value of the life insurance arrangement and whether it suits your circumstances better to accept a lump sum or to continue to pay the premiums and have your beneficiaries receive the full death benefit. Do not allow someone to confuse you by talking about what you might be able to use the money for. The financial world is filled with seemingly magic solutions like, “sell your life insurance and get a long term care policy”. One doesn’t necessarily have anything to do with the other. the proceeds can be used for most anything. Keep focused on the issue of your life insurance policy.

Secondly, work with an organization that you feel you can trust. Specifically, you should be assured:

• That the information will be held confidential and used only for purposes of evaluating your policy for a life settlement transaction;
• That you will receive more than one bid and the broker will disclose all bids to you; and,
• That the broker is acting as a broker and not buying your policy for resale.

Be wary of firms who promise “special deals” or preferred access to markets. Take your time and insist on complete understanding of you life insurance policy. Discuss it with your advisors and  your family.