If you, a family member or a friend own a life insurance policy that is no longer wanted or needed then read this article as it could be worth thousands of dollars. Many of my clients or their family members or friends own life insurance policies that were purchased for various reasons, such as to fund a college education, provide support for minor children or pay off a mortgage in the event of an untimely death. The reason for having the policy may no longer exist and the cost to keep the policy may be prohibitive. Additionally, an older policy may have a large premium and/or death benefit and the owner may be able to replace the policy at a lower price or reduced benefit.
Many people still believe that their only options if they no longer want to pay the premiums on a life insurance policy is to surrender the policy and receive the cash surrender value or, in the case of a term policy, stop paying the premiums and let the policy lapse.
There is an alternative for policy owners who no longer need or want an existing life insurance policy. That alternative is called a Life Settlement (or Viatical Settlement). A Life Settlement/Viatical Settlement is a transaction whereby the owner of the existing life insurance policy sells the policy to a life settlement company. The sale of a life insurance policy typically nets the policy owner an amount many times greater than the policy’s cash surrender value.
If you are interested in a life settlement for your policy then the next question is, “do I qualify”? While there is no minimum age of the insured, most life settlement companies want an insured at least 70 years old but the main factor is the insured’s life expectancy. The shorter the life expectancy the greater the offer to purchase the life insurance policy. Usually, the life expectancy of the insured needs to be less than a dozen years. The face amount (death benefit) on the policy needs to be at least $250,000.00.
The process of selling an unwanted life insurance policy can begin by contacting a licensed life/viatical life settlement agent (some of the attorneys at MPO are licensed). The life settlement agent will then shop your policy with life settlement companies. The life settlement company is going to want to appraise the policy and review the insured’s medical records. All of this is done at no cost to the policy owner/insured. This action does not obligate the policy owner to sell the policy. In fact, once the life settlement company determines if they want to buy the policy the policy owner may accept or decline the offer. Before accepting or declining the offer the policy owner should talk to an experienced attorney and CPA to determine the legal and tax consequences of selling the policy. While the tax consequences of life settlements are usually quite favorable there is still the chance that taxes may be owed on the proceeds from the sale of the policy in excess of the policy owner’s cost basis in the policy (i.e. amount of the premiums paid over the life of the policy).
If the policy is sold then the proceeds can be used for any purpose, including but not limited to investing the proceeds, paying for health care costs, long term care or other debt, taking a vacation, acquiring a new life insurance policy or making a gift to family members or charity.
The worst action a policy owner can take regarding their life insurance policy is to cash it out or let it lapse before they determine if it can be sold and for how much. Therefore, if you have a life insurance policy, ask yourself the following questions:
- Have you reviewed the annual illustration for the policy in the past two years;
- How long will the policy remain in force before the premiums increase (i.e., become cost prohibitive);
- You no longer want to or can afford to pay the premiums;
- Do you need cash to pay off debts, health care costs or long-term care;
- The reason you own the policy is no longer applicable i.e., no minor children, all your children have graduated college, your mortgage is paid off, you sold your businesses interest, etc.; or
- One or more of the following events has occurred since you purchased the policy: married; divorced; birth of a child; formation of a business; death of the named beneficiary; significant change in health (good or bad); quit smoking; or a parent has now become dependent on you financially.
If you own any life insurance policies please ask the attorneys at Midgett Preti Olansen to review the policy to determine if you are a good candidate for a life settlement.