By Ron RasmussenA life insurance settlement is a cash payment to the owner of a life insurance policy, for an amount greater than its value. With the change in ownership, the life settlement company becomes the new beneficiary, and is responsible for all future premiums to keep the policy in effect.
As the result of a rare staph infection of my spinal cord, I became an incomplete quadriplegic in 1997. I became interested in life insurance settlements in 2005, through the sale of one of my own life policies. I had taken out a ten year $500,000 level term policy shortly before I became paralyzed, with an annual premium of $3,000 and since I couldn’t afford the substantial increase in premiums, I was able to convert the policy to a universal life policy, and sold it to a life settlement company for $85,000. My only other option was to let the policy lapse, and receive nothing.
I decided to start a life settlement business, as I already had a life/casualty brokers license, and had owned a couple of service businesses before I became paralyzed.
Last year, $12 billion worth of life insurance policies were sold, according to statistics by the Life Insurance Settlement Association. In spite of this amount of business, the industry is not familiar to most people.
It is estimated that 89.5% of life insurance policies do not result in death claims. Life settlements typically cater to people over 65. The settlement is the sale of an unneeded or unwanted life insurance policy for a cash payment greater than the policy’s surrender value but less than the policy’s death benefit. For a convertible term life policy, it provides immediate cash and liquidity that would otherwise only be available after the insured’s death. Once sold, the third party (company) becomes the new owner of the policy, continues to pay the premiums, and as the new beneficiary, eventually receives the face amount of the policy as a death benefit.
A 71 year old male who no longer needed his policy for estate planning purposes
Policy: Universal Life
Face amount: $650,000.
Cash surrender value: $49,867.
Cash to seller: $229,808.
A 69 year old male whose premiums had become a burden.
Policy: Universal Life
Face amount: $5 million.
Cash surrender value: $0.
Cash to seller: $1,218,904.
Who should consider a Life Settlement?
Are you 65 or older?
Do you own a term, universal life, or survivorship policy?
Is your policy $250,000.00 or greater. And at least two years old?
Is your policy lapsing or being surrendered?
Are your premiums no longer affordable?
Have your estate taxes changed?
Have you outlived your beneficiaries, or are your children grown up and no longer dependent on the insured?
Have there been changes to your health?
Some of the benefits include:
Capital for annuities, or other investments.
Pay off a mortgage or other debts.
Provide cash gifts to family members.
Health related expenses.
In general, a life settlement is appropriate if the policy holder is considering letting a policy lapse or be surrendered for its cash value. On average, the life settlement would pay about four times the cash surrender value, depending on the age and health of the insured.
A life insurance settlement allows your policy to become a real current asset to be used in your lifetime. The proceeds from a life settlement are generally tax-free up to the cumulative premiums invested in the policy. Any amount received above the cash value is generally considered to be long-term capital gains. The insured must provide information on his or her medical history, and current medical condition. However, unlike life insurance, no current medical exam or lab work is required.
Anyone in a fiduciary capacity, such as C.P.A.s financial advisors, or probate attorneys, should make their clients aware of the life settlement possibilities.
Kasmussen in a life insurance broker. His Web site is www.life-settlements-company.com.