LIFE INSURANCE SETTLEMENTS
March 2006
We frequently observe our clients avoiding anything to do with insurance, as well as estate planning. Both topics deal with death, an understandable subject to avoid. But read on, this article is about putting some of your insurance behind you. During our lives, we purchase various life insurance policies. By the time you reach retirement, the original reason you purchased the policy may no longer be applicable. Possibly, your children are grown or you have reached a level of financial security. The policies have now become obsolete. You then reluctantly have to face another decision about insurance.
If you have a term policy, it is easy. You just stop making the premiums. But if you purchased a policy that builds cash value, it is a more complicated decision including dealing with the premiums increases as you age. Until recently, you had only two options, pay the premiums or turn the policy back to the insurance company and receive the cash surrender value minus a surrender charge. Typically, the remaining cash value was so low, policy holders tended to maintain an unneeded policy. Alternatively, you let the policy run out, paying nothing but watching the cash surrender value pass through the hour glass until expiration.
A third option exists today. You may sell these obsolete policies to a life insurance settlement company. Life insurance settlement companies have developed sophisticated mortality tables allowing them to glean profits from obsolete policies. As a result, life settlement companies may be able to purchase your policies for substantially more than the cash surrender value offered by the insurance company. You can use the duns obtained in a cash settlement for any purposes. The funds are tax free up to the premiums paid during the life of the policy. Settlement companies look for policies with insured over 65, with death benefits over $100,000.
Life Insurance settlement companies are not without controversy. The life insurance settlement industry arose out of the viatical settlement industry which made money in a less than exemplary way, buying policies from AIDS patients. Life insurance companies have vigorously lobbied against life settlement companies. Your agent may be precluded from informing you of your rights to assign the policy. We understand your desire to stay away from something that feels controversial.
A complete understanding of the existing life insurance settlement industry will reveal they are filling an important function, which is buying policies from healthy policy holders. Both your original insurer and the life insurance settlement company are trying to make a profit, vying for the purchase of your policy. But if the only buyer is your original insurance provider, you get the aforementioned low cash surrender value. Professor Neil Dougherty of the Wharton School described it best in his article “The Benefits of a Secondary Market for Life Insurance”, as he pointed out the benefits to consumers through secondary markets for mortgages and stocks. “Consider what your house would sell for if the only buyer was the original seller?” I can imagine Mr. Potter from It’s a Wonderful Life, controlling all real estate in Delaware.
The advent of the life insurance settlement companies creates needed competition for insurance companies and takes away the monopolistic position your existing insurer has over your policy. The insurance settlement industry is now more regulated and controlled by larger companies thus reducing the opportunity for fraud. Policies are pooled and sold to large investors including a pool created in 2001 by Warren Buffet’s company Berkshire Hathaway.
If you have a cash value life insurance policy and you can no longer afford the premiums or the circumstances surrounding the policy have changed, you should consider the sale of the policy to a life insurance settlement company. You may submit the policy information directly to the life insurance settlement company yourself (www.lifesettlementinstitute.org) or hire a licensed broker to handle negotiations with competing companies. If you have questions, please contact Diane Burke at (302) 656-6632 or DBurke@CoverRossiter.com. Cover & Rossiter can help with your tax planning and investment planning needs.