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SELLING YOUR LIFE INSURANCE
Most people only think of buying life insurance, not selling it. But in certain circumstances, selling your life insurance policy could be a good idea!
There are many companies that offer viatical and life settlements. A viatical settlement is a cash offer for your life insurance, if you are terminally ill. A life settlement is a cash offer for your life insurance, usually when you have a downturn in your health. When should you consider selling your life insurance?
First a few basics. Life insurance has two basic forms, term insurance and whole life. Term insurance has no cash surrender value and is payable on death. Whole life insurance generates a cash surrender value that generally grows over time, and a stated death benefit.
EXAMPLE – Lets say that you have a $100,000 life insurance policy. The premiums are $500 per year and it has a $10,000 cash surrender value. If you were to turn it into the life insurance company, they would pay you $10,000, the cash surrender value. If you sold it to a viatical or life settlement company you might get $40,000, an increase of $30,000. The amount you get will be dependent upon how long the company thinks you are going to live.
Do you still need your life insurance policy? Back in school I learned that you should buy life insurance to cover a know risk, such as a father who has small children. He needs life insurance in case he dies prematurely. For those who can’t afford the premiums or no longer need the policy, selling it might be a good option.
On the downside, the proceeds may have tax implications and the beneficiaries may not be happy to learn that they are no longer beneficiaries. Some studies suggest that 90% of policyholders would be better off financially by holding onto the policy.
When you apply to a viatical or life settlement company to sell your policy, you might not have to take a physical, but you will have to submit approximately 5 years of medical records. They want to know as much about your physical condition as they can.
Because there are only so many seniors with large life insurance policies who could take advantage (or be taken advantage of) by selling their life insurance, some slick insurance salesmen have come up with a new scheme. It’s called SOLI (stranger-owned-life-insurance). With SOLI, the agent entices you to purchase a $1 million life insurance policy. They might “rebate” to you $50,000 for purchasing the policy. Sounds great doesn’t it? You get $50,000 for a couple hours work. There are risks and legal issues that are beyond the scope of this article.
Seniors should be wary of deals that offer quick cash for allowing life insurance to be place on their lives and should take the time to analyze the pros and cons of selling their life insurance versus keeping it and making the payments to keep it active.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org