A Fresh Look at Life Settlements in 2015
February 24, 2015
by Stephen Terrell
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Rather than let unneeded term policies expire, clients may be able to sell them to a life insurance settlement provider. Life settlements were historically limited to whole-life policies, but new developments offer advisors greater flexibility to access cash for a variety of insurance products.
Life insurance settlements have been around for more than 20 years, and while the transactions are not for every situation or every life insurance policy, their overall utility for financial planning has increased significantly. Life settlements can breathe new life and value into term policies, free up capital trapped in irrevocable life insurance trusts and even offer a way for clients to sell half a policy while keeping half of the death benefit.
Life settlements deserve a fresh look.
As background, life settlements enable an individual with a life insurance policy, typically a senior, to sell it on the open market for immediate cash. The seller receives payment that is less than the death benefit but higher than the surrender value, and the insured is no longer required to make premium payments on the policy. The purchaser will receive the death benefit payout when the insured passes away but must also continue paying the policy premiums.
Traditionally, a life settlement makes the most sense when an insured no longer needs the insurance coverage and/or can no longer afford it. If the insured’s reason for owning the life insurance changes — following a divorce or after a spouse’s death for instance — a life settlement enables the insured to receive a payout on coverage that might have otherwise been surrendered. If premium costs rise and the insured can no longer afford to keep the coverage, then a life settlement can pay a lump sum for a policy that might otherwise lapse.
In recent years, additional scenarios have emerged that often make sense for policyholders.
Term insurance can be converted to permanent insurance and sold as a life settlement
For nearly 20 years, life settlements were only an option for whole life policies. Funding companies wanted to purchase permanent policies and avoid the risk of term policies. Yet term insurance remains one of the most widely used financial protection tools. Most people who buy term insurance hope they will never need it; and when the term expires, they are thankful that they remain alive and well.
However, term insurance with a conversion rider can offer a windfall. Life settlement providers will evaluate policies nearing the end of their term, and may provide illustrations that include the cost for conversion for seniors. Seniors can convert the policies to whole life and perform a life settlement in a multi-part transaction that will provide them with a payout and no out-of-pocket expenses.
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