What is
Sell Settlement? |
You and your spouse are of retirement age. You've sold
your business, your mortgage is paid off, and you're free of debt.
If you fit this description, you might be considering life settlements or
"senior settlements." This is where you sell your life insurance policy to a
third party, which in most cases is an investment company.
For some, a life settlement can be an attractive option. It allows you to
receive a large sum of cash in exchange for your insurance policy when you
are still alive, it eliminates premium payments, and it accommodates the
changing needs of dependents.
Life settlements have raised many questions in the insurance industry,
including concerns about possible insurance and investment fraud. Several
insurance companies and trade groups warn policyholders about the
consequences of selling their policies to third parties.
Before you enter into a life settlement, it's important to determine whether
selling your life insurance policy is your best option.
How it works An investment company buys a life insurance policy by paying a
percentage of the policy's face value to the seller. Among the factors that
contribute to the selling price are the death benefit of the policy and the
medical condition and life expectancy of the policyholder. When the company
buys the policy, it pays all future premiums and collects the entire death
benefit when the insured dies.
Investment companies buying life insurance policies generally look at two
things: whether the policy is worth a large sum (generally no less than
$250,000) and the health of the policyholder. From the investment company's
perspective, a healthy policyholder means the life insurance policy might
not generate a profit for a long time.
Life settlement companies use various methods to determine when a former
policyholder dies. Some firms periodically send a postcard asking the
insured to send it back. If the postcard is not returned, the company
investigates further. Others designate a third party (a lawyer, for example)
to stay in touch with the former policyholder.
Life settlements differ from their financial cousins, viaticals, which are
settlements where a terminally ill policyholder sells a life insurance
policy to a third party. In life settlements, the policyholders are not
terminally ill. Their health has simply declined. An example of this is a
person who develops a heart condition.
The difference in health explains why life settlements are riskier than
viaticals from the investor's perspective: You don't know when the insured
is going to die. As a result, the sick are likely to get more money for
their policies through viaticals. Policyholders may get 50 to 80 percent of
their policy's face value in a viatical sale, but only around 20 percent in
a life settlement. Business is booming The life settlement industry has seen
significant growth in recent years. Life settlements allow policyholders to
access the fair market value of their life insurance, by selling their
policies and receiving payments greater than the cash surrender value.
Tim Trankina, president of Peachtree Settlement Funding of Norcross,
Georgia, says the cash seniors receive in life settlements can help them
meet their current financial needs, such as retirement, estate planning,
reinvestment, or extended care. Trankina says it also relieves seniors of
premium payments, which can become burdensome on fixed incomes.
"When people get into their 70s, their premiums can increase dramatically,"
says Trankina. "The life settlement option puts more cash in their pocket."
Peachtree's CEO, Jim Terlizzi, says with changes in the estate tax, he
expects more people to look at their life insurance policies as unnecessary.
Industry views
While life settlements are a good option for some, the insurance industry
warns policyholders to be careful. The American Council of Life Insurers (ACLI),
a Washington D.C.-based trade group, points out beneficiaries will lose
valuable insurance benefits if the policies are sold to an investor. Also,
if someone sells his life insurance policy and his health is less than
optimal, future insurance coverage might not be attainable. Jack Dolan, an
ACLI spokesman, says life settlements do not reflect any of the original
goals of buying life insurance. "Life insurance was born out of the desire
to protect the widow or orphan if the breadwinner of the family died," Dolan
says. "But life settlements do not foster any of that, and that raises a
number of concerns." More |