Life settlements offer seniors a way to turn their life insurance policy into income for their remaining years. In a life settlement, a senior who has exhausted his assets, is 65+ and not chronically or terminally ill, sells his life insurance policy to a third party for more than its cash surrender value (the amount he would receive if he voluntarily terminated the policy prior to its maturity) but less than its net death benefit. The purchaser takes over premium payments on the policy, and collects the benefits upon the original policyholder’s death.
In theory, life settlements sound quite attractive: in 2009, the United States Senate Special Committee on Aging determined that life settlements yield an average of eight times more money than the cash surrender value offered by life insurance companies.
However, there is a downside: like reverse mortgages, life settlements can have high transaction fees. A number of organizations will gain access to your health information. And releasing one’s assets in this way can substantially reduce your estate, meaning there will be less to leave for loved ones. Therefore, a life settlement is recommended only when the policyholder is out of income options, has a relatively limited life expectancy and is perhaps unable to continue to pay the policy premiums.
To safeguard seniors, FINRA (Financial Industry Regulatory Authority), a non-profit, non-governmental organization dedicated to investor protection, recommends people ask the following questions to determine whether a life settlement makes sense for them:
- Is the life settlement broker or provider licensed in my state? Check with your state insurance commissioner. If you are working with a securities broker, use FINRA BrokerCheck.
- What will happen to my policy? The individual or company that purchases your policy will become responsible for paying the premiums and will collect the death benefit when you die. They will also gain access to extensive personal information about you, including your health status.
- What information will I have to provide? When you sell your life insurance policy, you authorize the release of medical and other personal information, which the buyer may share with other parties, including lenders or third party investors.
- How can I protect my privacy? Before accepting any offer from a life settlement company, find out how the company protects your confidentiality.
- How do I get the best price for my policy? If you are using a life settlement broker, ask what bids were received and what steps the broker used to make sure you are being offered the most competitive price available.
- What are the transaction costs? The commissions paid by life settlement companies to life settlement brokers and other financial professionals involved in the transaction can be as high as 30%. Ask your broker or other financial adviser what they are being compensated for their role in the transaction and how their compensation is being calculated.
- What are the tax consequences? The lump sum payment you receive in exchange for your life insurance policy may be taxable, depending on your circumstances. Before entering into a life settlement, check with a tax professional.
- What if I change my mind? You do not have to accept an offer to purchase your life insurance policy, even if you shopped around for the best price. If you do accept an offer and later reconsider, some states allow you to change your mind within a set time period.
- Is the life settlement in my interest or my investment professional’s? The person purchasing your policy gains a financial interest in your death. And almost half of all life settlement transactions result in the purchase of new life insurance.
- Am I being pressured to make a fast decision? A legitimate investment professional will provide clear answers to your questions and will give you the time you need to make an informed decision.
Finances and health care are vital issues for seniors and their loved ones. To support you in making the best decisions for your evolving needs, please review this comprehensive guide to paying for health care and senior living.
About the Author:
Amara Rose is a personal and business coach with a broad background in health and positive aging. She writes widely about senior housing, elder health and nutrition, lifelong learning and the spiritual dimension of aging. Contact her via [email protected]