Money Power: Selling cash-value policy is an option
BY SANDRA BLOCK Money Power
Sunday, December 30, 2012
12/30/12 at 5:28 AM
If you need money and don't need to preserve the death benefit, you may be able to sell your cash-value policy to an investor.
Life-settlement companies buy policies for cash, continue to pay the premiums and collect the death benefit when the insured individual dies. The size of the settlement varies, depending on the size of the premiums and the policyholder's life expectancy, says Bryan Freeman, founder of Habersham Funding, a life-settlement company.
The settlement amount is typically 12 percent to 25 percent of the death benefit, though someone with a terminal illness and low premiums may receive up to 60 percent of the death benefit, Freeman says.
Here's an example: A 73-year-old man had a universal life policy he purchased in 2003. The policy had a $2 million death benefit and cost him nearly $40,000 in annual premiums. He sold the policy to the Lifeline Program for $515,000 - more than twice its cash value of $250,000.
If you're in your 50s and feeling fine, this isn't an option for you. Brokers are primarily interested in policyholders who are in their 70s, or younger if they have a serious illness, says Darwin Bayston, executive director of the Life Insurance Settlement Association.
And that's the reason life settlements make many people uneasy. Investors profit from your death, and the sooner it occurs, the more money they make. You'll be asked to provide detailed information about your health and give the life-settlement company ongoing access to your medical records. Be aware that taxation of life-settlement payouts remains murky and legislation to clarify the issue has languished in Congress.
Most sellers work with an independent insurance broker who negotiates with buyers on their behalf. A financial adviser with experience in insurance products may be able to refer you to a broker.
Once you've received a referral, contact your state insurance department to find out whether the broker is licensed, a requirement in most states. Your state insurance regulator can also tell you whether a broker has a record of complaints. Avoid brokers who base their commissions on the death benefit instead of the amount of the settlement. You should expect to pay about 10 percent of the settlement amount in fees, Bayston says.
Find a list of companies through your state insurance commission or at the Life Insurance Settlement Association's website, tulsaworld.com/lisa.)
Original Print Headline: Selling cash-value policy is an option
Sandra Block is a senior associated editor at Kiplinger's Personal Finance magazine. To send her a question or comment, go to tulsaworld.com/kiplingerfeedback.