Are you considering selling your life insurance policy to a life-settlement company? In this transaction, the owner of the life insurance policy receives a portion of the cash value of the policy and the life-settlement company would receive the rights to the settlement awarded from the policy upon the owner's death. After the sale, the owner has no more responsibility for the policy; the life-settlement company pays policy premiums and collects the settlement upon the owner's death.
Selling A Policy
According to Insure U, selling a policy is sometimes referred to as a "viatical settlement." The owner is called the "viatal" and the buyer the "viatical settlement provider." There are numerous reasons for selling a policy, including obtaining money to pay the medical costs associated with a long-term or serious illness. In any viatical settlement, the amount the viatal receives is greater than the policy's cash surrender value, but less than its death benefit or full cash value.
Prior to selling a policy, Insure U recommends considering:
- Tax implications: You might have to pay state or federal taxes on receiving any funds from your life insurance settlement early.
- Creditor rights: In some states, creditors have the right to collect from cash payments you receive from a life insurance policy.
- How long you have to change your mind: Some life-insurance settlement companies offer owners a few days to change their minds and return the cash benefits they received. This may benefit owners who are unsure about whether to sell their policy.
- Whether you will still need protection: There's no purpose to selling a policy if part of your long-term investment plan involves life insurance.
- How much cash you will receive: Investigate how the company determines how much cash you will receive. A company that charges more fees than others for no apparent reason may not be the best one to engage in a transaction with.
- Whether you need permission to sell: A policy that is employer-sponsored or owned may need employer approval prior to selling.
Shop around before agreeing to work with any one life-settlement company. This will ensure that you get the best deal for -and are comfortable with- selling your policy.
Numerous companies engage in life insurance settlement transactions. Some companies require that policy owners be represented, either by an insurance agent or an attorney. Other companies are brokers, in which they act as intermediaries between funders, meaning the investment firms or other companies that seek to purchase policies, and the owner or their representative.
To find a company, consider checking with the Life Insurance Settlement Association. This association's website allows users to search for settlement company or brokerage firm in a specific state or able to legally conduct business in a state. Searches provide company contact and licensure information. All association members must agree to the association's bylaws, code of ethics, and provide a statement of business practices. Some options include:
- Legacy Benefits: This company was established in 1991, making it one of the oldest in the industry. It specializes in purchasing policies from owners who have 15 years or less left to live. However, the company does not work directly with owners, but instead only with third-parties such as financial advisors and life insurance agents.
- Life Equity: This company purchases in-force policies for investment firms. It evaluates all policies prior to determining if an offer can be made.
- Maple Life Financial: This company purchases life insurance policies for investment firms. It undertakes policy acquisition and investigation on behalf of those firms.
- Magna Life Settlements: This company requires owners to be represented. After evaluating a policy, it works with the representative to determine policy value and payment processes and terms.
You can also sell your policy yourself through Amrita Financial. This company investigates the value of your policy and then allows you to list it online and collect bids for its sale. The company charges a commission, but offers a refund of that commission under certain circumstances.
How to Obtain a Settlement
Each life insurance settlement company and brokerage sets the rules for the policies they are interested in purchasing. In a brokerage, these rules are often determined by what the brokerage firm's clients (investment firms) are after. To increase the chances of your being able to obtain a settlement, consider:
- Not touching the cash value of your policy: Take out a loan or a portion of the cash value of the policy lower's the policy's value, which may make it less attractive.
- Be prepared to provide medical records: Most settlement companies require that owners have a physical or provide medical records before purchase. This helps determine how much the investment can grow prior to the owner's death.
- Keep up to date on payments: A lapsed policy is unattractive to buyers.
Weigh the Pros and Cons
If you need cash now, a life insurance settlement may be best way to get it. But, as with any other asset, you want to get the best value. To that end, investigate the possibilities and compare the payment offers of a number of buyers before settling with one.