Settlement Options Life Insurance
Welcome to Life Settlement Option, a brokerage firm dedicated to helping life insurance policy owners test the life settlement market for free and negotiate for the highest offer with no obligation to accept.
If you searched life insurance settlement options then you've probably heard a little bit about life settlements, and the option of selling your existing life insurance policy to an investor. In this article we will cover a number of topics including the history, why people consider selling, how a life settlement works, and settlement options for life insurance policies.
Why Consider a Life Settlement?
There's a number of reasons seniors consider doing a life settlement, and it's certainly not for everyone. As a broker I often advise clients that are curious; if you need the insurance protection and you can afford it, then by all means go ahead and keep the policy. Life insurance is a great way to protect loved ones, debt, company ownership, and even leave tax free inheritance, but if you end up living a longer life, then your contract may end up becoming a bad investment.
People typically consider a life settlement for the following reasons:
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Their premiums are too expensive and perhaps the money is better invested elsewhere at this point
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They don't need the coverage anymore
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They're in a Long Term Care situation and don't have LTC insurance. Selling their policy helps them afford the care they need
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Their term policy is nearing the end of the term and their policy is still convertible. Check your policy for the "conversion" deadline, or simply call your carrier and ask if your policy is still convertible. If it is, we may be able to sell it!
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They have a terminal illness and want to live out their final years to the fullest
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They need access to cash for personal reasons, to help put a down payment on a property, buy a Cadillac, remodel their kitchen, etc.
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Prefer to invest the money elsewhere, possibly a safe index annuity
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Retiring or selling a business where there is a policy to protect their share of the business. The policy is too expensive to keep going, so they sell instead of hanging onto it
The most common type of policy sold is universal life, but sometimes whole life, and even term which can still be converted is sold too. If you are asking, "can I sell my term life insurance policy for cash," this article might help answer your question.
Life Settlements: These plans allow you to sell your life insurance policy for its present value to raise cash for any reason. This option is usually only available to women age 74 and older and to men age 70 and older. You may choose to use the proceeds to pay for long-term care services. (2)
Give us a call at 213.784.1481 or fill out the form to be contacted and learn more about how much you could get to sell your policy!
Life Settlement Brief History
To cover some basics, in 1911 the US supreme court passed a law that allowed for the transfer of ownership of a life insurance policy to a 3rd party. Life settlements, also known as viaticals, didn't come about until the 1980s during the AIDS epidemic when people needed access to money for health care and living expenses. Since then HIV treatments have allowed people to live much longer with HIV, but the need for people to sell their life insurance has only continued, and there are a variety of common scenarios in which people decide to sell their life insurance contract to an investor.
Nowadays there are a wide variety of both institutional investors, some with several billion dollars to buy and manage policies, while others represent individual capital. In the past it was possible that an individual would purchase a policy from someone else, however nowadays it is required that a life settlement agreement be performed through a life settlement provider to ensure all legal requirements are being met to protect both the seller's family and the investor.
Universal Life Policies
Universal life policies are actually considered by investors to be less expensive than whole life policies, but the majority of them have an increasing cost of insurance as you get older. The cash value account is intended to offset this increasing cost, but because none of us know exactly how long we'll live, it becomes very easy to mismanage the cash value account and end up using nearly all of it to help cover your premiums. Then, before you know it, the carrier may be requiring significantly more than you're used to paying in premiums just to keep the policy in force and it may be unaffordable.
During the sales process, clients are often encouraged to use the cash account as a future retirement savings account. You can borrow the money and you don't have to pay it back! What happens when you borrow this money is that eventually you will run out of it. With your insurance cost increasing each year, you may have been paying $10k a year in premium for the last 20 years, but now you have no cash left in your cash value account, and your cost of insurance is now $40k a year instead of $6k when you first started 20 years ago. This means if you don't cut a check to the insurance company for $40k this year your policy will lapse and you will lose everything you've put into the policy thus far.
Settlement Options — in life insurance, how proceeds are paid to the designated beneficiaries. Most life insurance policies provide for payment in a lump sum. The four most common alternative settlement approaches are: the interest option, under which the insurer holds the proceeds and pays interest to the beneficiary until such time as the beneficiary withdraws the principal; the fixed period option, under which the future value of the proceeds is calculated and paid in installments for a specified number of years; the fixed amount option, under which a fixed dollar amount is paid in periodic installments until such time as the principal and interest are exhausted; and the life income option, under which a stipulated amount is paid periodically to the beneficiary throughout his or her life. (1)
Here's an Example
If you're confused by the last example, most Universal Life policies are flexible meaning you can pay $7k this year, or $10k, or $12k+ if you wanted. There are baseline costs of the policy including your cost of insurance as well as administrative costs, and anything you pay beyond that goes into your cash value account which will increase your cash balance faster, especially with those nice interest rates. In fact, if you pay into the policy enough, sometimes the interest you make each year is enough to cover your minimum premium, and you don't have to pay anymore, that is until you run out of cash, which can happen in a few short years when you're older. In your 60s this may seem unlikely, but you may reach your 80s or 90s and find your cash value running out rapidly even though you felt you had funded it so well 15 or 20 years prior. It's an unfortunate situation to be in when suddenly you have an unaffordable premium just to keep your policy in-force a little longer. If you can barely pay it this year, who knows if you'll be able to afford it next year too, and who knows how many years you really have left! It's painful to think you could lose it, but then again doing a life settlement might just save you and get you a large sum of cash now.
The other predicament universal life policy owners are in are guessing how long they're likely to live. If you have a $1MM policy and happen to pass away with $500k in the cash value account, your death benefit is still $1MM, same as if you passed away with $1 in you cash value account. So, part of managing a policy includes guessing how long you're likely to live. You can have your current policy illustrated to stay in-force until age 80, or 90, or 100, or 110, etc.
As an example if you're 70 and you think you probably won't make it past age 85, you'll likely have your policy illustrated to age 85 and it says you need to pay $15k a year for the next 15 years to keep your policy in-force until age 85. Now you're 86 and you'll need to pay a lot more than $15k to keep it in-force for another year because your cost of insurance is now higher and there's no cash value left to help cover the difference. Hindsight is 20/20, and 15 years ago you could have illustrated your policy to age 90 instead and it would have said to pay $20k a year. Now that you're 86 it would have made more sense to pay the $20k a year instead of $15k, because now they're asking for $40k just to cover this next year, and it might be another $45k the following year.
This is a hypothetical example using simple numbers, but follows a very realistic scenario. What's even more common is policy owners taking a more hands-off approach to managing a policy. If this year's annual statement says a policy has $40k of cash accumulation, the premium is $12k, and the client is in their late 70s, retired, and doesn't have a lot of liquid assets, they may just skip paying the premium altogether. The $12k will come out of the cash value account, they're insured for another year, and next year the cash account balance will be closer to $28k, and the premium may be $14k. In just a few short years policy owners can go from a comfortable place in their policy to a very uncomfortable place when they run out of cash. This is unfortunately all too common, but the good news is that there's life insurance settlement options, and we're here to try to get you as much money for your policy as we can instead of losing everything.
What are Settlement Options for Life Insurance Policies?
The most standard type of settlement options for life insurance policies is usually a clean sale, meaning the investor pays a purchase price upfront, assumes all future premiums, and also collects the death benefit upon maturity.
When people first consider a life settlement they are caught off guard by the idea that there's no more death benefit for their beneficiaries. The whole idea of a settlement is that they're getting money now instead of upon death, which can also be referred to as living benefits, and is going to be less than their death benefit because there are future premiums to be paid. What many don't consider in a life insurance policy is the cost in premiums that it takes before the death benefit is paid.
In other words, if you have a $100k policy, pay the first premium of $75 and get hit by a bus the month after the policy starts, technically you got $99,925 because you paid the $75 premium. In more common scenarios someone has paid $60k over the years to keep their $100k policy in-force, and if that policy were to mature tomorrow, technically you got $40k out of it because you'd already paid $60k in premiums. Life insurance is not intended to be a get rich quick scenario, and when you're considering a life settlement you must consider how much more you will have to pay in premiums to receive the full death benefit.
If we could all buy a house without having to borrow money from the bank, we would end up saving a lot of money that just goes to paying interest, and the same goes for a life settlement. The investor is essentially loaning money to buy the policy and pay future premiums. While they have the capital to afford it in exchange for earning interest, perhaps as an individual you're better off taking the settlement and ditching all future premiums.
So what are settlement options for life insurance policies where people still want a part of the death benefit? There's an alternative settlement offer commonly known as a Retained Death Benefit offer. In this settlement the buyer will offer less upfront than they would with a full buyout, they still assume future premiums, and they agree to pay you part of the death benefit if it matures within a certain time frame declining in amounts until it reaches $0.
As an example, let's say someone has a $500k policy, and their doctor told them they only had 3 years to live. An investor might say people with the same condition often live 6 years, and offer you $200k to buy the policy. You know your health better than they do, and based on what the doctor said and your own personal feelings you think you're not going to live more than 3 years. The investor alters their offer and agrees to pay you $75k now, and if you pass before 1 year, they'll pay your family another $375k, totaling $450k. If you pass before 2 years, the additional payout goes down to $300k totaling $375k, 3 years is $250k, 4 years is $100k, 5 years is $50k, and 6 years is $0. If you end up living more than 6 years then the initial $75k will be all you receive, but if you pass away in less than 3 years then you stand to get $325k total out of it instead of the $200k full-buyout option. This can be a challenging decision, but you know your health better than anyone else, and may end up getting more money in this scenario. It's nice to have different settlement options for life insurance.
How to Sell Your Life Insurance Policy
The first step in considering a life settlement is to get a free appraisal by filling out the form on this page. With some basic information, we can get a sense on whether or not your policy qualifies, and an approximate range of where we think offers will come in for your policy.
If your expectations are within the approximate evaluation, then we begin gathering the required information needed for investors to review and make offers. This includes ordering an in-force illustration, typically with level premiums to age 100, and the last 5 years of medical records from your primary care physician and any specialists you see such as an oncologist or cardiologist. I also have a Hipaa form that needs to be signed which allows me to share your medical records for the sole purpose of getting life settlement offers.
Once offers start coming in, there's a negotiation process over several weeks to see who the most motivated party is. If you're happy with that number, then the deal moves into the contract and escrow phase, which is similar to selling a home. Legal due diligence is done to ensure both the seller and buyer are protected, and ends with the transfer of ownership and beneficiary of the policy to the new owner. As soon as these changes are officially documented, then the settlement funds are released to you from the escrow account and are typically wired to your bank or a live check is sent, whichever you prefer. The policy is still yours up until this point, and depending on which state you live in you may have another couple weeks to reverse the deal and get your policy back.
While I can't say freak accidents never happen, it's very unusual that an insured passes shortly after doing a life settlement. Most everyone that decides to do one is happy they did, especially when the settlement hits their bank account and they realize they are freed from the financial burden of paying future life insurance premiums. They can take their money and move on in another direction, whether that be living more comfortably, investing somewhere else, or distributing wealth while they are still living, and it's our job to help you get as much as we can for your policy.
To get started, fill out the free appraisal form or give us a call at 213.784.1481. Learn more about how to sell my life insurance policy today!
Zack Taylor
4 years in life settlements