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Life Settlements have been in the market for decades, and over the last ten years they have become a mainstream financial option for the owner of an unwanted, or unneeded life insurance policy. But for many people they may only have a vague understanding of how a life insurance policy can be turned into a lump sum payment to the owner that can be used for anything they want. Here are 6 facts about Life Settlements anyone who owns a life insurance policy needs to know.
- Did you know a life insurance policy is legally recognized as an asset of the policy owner? This means the owner has the same personal property rights as the owner of a home. The owner can sell their policy if they want for its highest market value. A person wouldn’t abandon their house after years of mortgage payments, and the owner of life insurance policy shouldn’t abandon their policy after years of premium payments.
- Did you know that seniors abandon billions of dollars worth of life insurance every year? According to a Conning and Company study, seniors on an annual basis own over $200B worth of life insurance policy death benefits that could qualify to be exchanged for a new living benefit in the secondary market. The danger for these seniors is the fact that as many as 9 out of 10 polices are in danger of being be lapsed or surrendered before ever paying out a death benefit. A critical fiduciary responsibility for advisors is to make sure their clients understand that a life insurance policy may have considerable settlement value before it would needlessly be lapsed or surrendered.
- Did you know Life Settlements can be especially beneficial to help seniors who still own a life insurance policy that are struggling with the effects of aging or failing health? Life Settlements are the only financial option today that will reward someone with more value for their policy the older or more impaired their health is. Instead of lapsing or surrendering their policy, they could potentially get far higher secondary market value from their policy through a life settlement. When thinking about who would qualify for a policy settlement, think of the process as reverse underwriting. The older and sicker a person is the higher value they will receive when Xchanging their policy. People age 70 and above who are chronic, critical, or terminal in their condition are the appropriate prospects for this option.
- Did you any type of life insurance will qualify for a policy settlement? As a general guideline, Universal Life, Term Life and Whole Life are the most common types of life insurance policies that will qualify for a life settlement. Policy settlements work primarily for insureds above the age of 70 with impaired health conditions that would be an automatic decline for any other form of coverage. Overall, policies that were originally issued as standard or preferred, and with a premium to death benefit ratio of 5% or less will most likely qualify for a policy settlement.
- Did you know that the funds from a policy settlement can be tax-free? If the policy owner is diagnosed with chronic or terminal conditions, the funds received from a life settlement are exempt from Federal taxes. Also, any funds received at or below what they have paid in premiums over the life of the policy is exempt from taxation. Funds received above what has been paid in premiums would be taxed as capital gain. *This information is intended only to be a guideline and not tax advice, which should always be sought from a certified tax advisor.
- Did you know a death benefit can be exchanged for living benefits? The hottest insurance and annuity products sold today offer living benefit riders and hybrid-conversion options to address financial challenges related to critical illness and long-term care. People understand the value of maintaining death benefit protection for their families while they are young and healthy, but then later having the flexibility to switch from a death benefit to a living benefit to address the challenges of aging actually increases the value of the life insurance policy. Life Settlements provide “after-market” options to exchange a death benefit for living benefits for policies originally sold without those options. Now seniors can elect to exchange a policy through a life settlement at absolutely no cost for options such as lump-sum cash far in excess of any cash value, tax-free long-term care benefits, a guaranteed lifetime income stream, or ongoing death benefit protection with no more premium payments.
