Are you having difficulty keeping up premium payments on a life insurance policy, or do you no longer need the policy? Policyholders once had only two options: let the policy lapse or turn it in for a meager cash surrender value. Now there’s another, often vastly more lucrative alternative: sell the policy to a life settlement company.
Such companies, which have sprung up only in the last several years, buy insurance policies — term, whole life, universal and other types — from seniors, pay the premiums, and collect the death benefit when the policyholder dies. Payments are usually significantly more than a policy’s trade-in value (but less than the death benefit, of course).
To give one example, a policy with $1.25 million in coverage and a $190,000 cash surrender value was sold to a life settlement company for $415,000.
Life settlements are different from viatical settlements, in which a settlement provider purchases policies from policyholders who are terminally ill. Life settlement companies typically buy policies from people over age 65 who have had a downturn in their health, but who are not terminally ill, and who own a policy with a face value of at least $100,000 to $250,000, depending on the company.
Life settlement companies are typically licensed by the state insurance department, although not all states require a license. The industry leader is Coventry First of Fort Washington, Pa., which has 40 percent of the market share and has purchased more than $1 billion in life insurance. Or, your financial advisor may send your policy to a broker, such as First Secured Life, which will shop the policy around to various life settlement purchasers to get the best deal. The potential market for life settlements has been estimated to be as large as $134 billion. See related article, “New York Sues Life Settlement Company for Influencing Brokers.”
There are some downsides to such transactions, however. For one, some or all of the proceeds may be taxable. In addition, the beneficiaries of your policy may not be pleased with the sale, which is why some life settlement companies require beneficiaries to sign off on the transaction.
Selling a policy may not necessarily be a good deal for the policyholder, depending on the circumstances. According to one estimate, there’s a 90 percent chance that a policyholder would do better financially by holding onto the policy than selling it.
Still, the vast majority of life insurance policies either lapse or are surrendered before a death claim is paid. For those who can’t afford premiums or no longer need a policy, selling to a life settlement company can be a great option.
SOURCE: ELDER LAW ANSWERS