April 17, 2020
It seems like we have been living in continuing unprecedented times – Covid, inflation, economic downturn, stimulus, war, and list goes on and on. While all of the economic uncertainty impacts all of us, it hits one demographic the most – America’s seniors. The reason is that living on a fixed income makes it very difficult to adjust to these unpredictable, changing conditions.
Are There Solutions I Don’t Know About?
YES! The good news is that there are options available to make those important adjustments to ensure that you can close any of your budget gaps and maintain your lifestyle. Of course no one could have prepared for this, but there is a specialty financial tool available to retirees who are finding their planning has had the rug pulled out from under them by no fault of their own.
This important tool is known as a life settlement, viatical settlement, or senior settlement, the secondary market for life insurance policies. While you may not have heard of the life settlement industry, it has been around for over 35 years. There are many reasons that people enter into a viatical settlement or life settlement transaction. The sale of a life insurance policy was affirmed by the U.S. Supreme Court in a case known as Grigsby v. Russell in 1911, ruling that life insurance was a personal property that could be sold like any other asset.
What is a Life Settlement and Viatical Settlement?
There has been a growing trend in seniors who are life insurance policyholders to tap into the market value of their life insurance policy. The sale of your life insurance policy for a lump sum cash payment is known as a life settlement or a viatical settlement. When you sell your policy, you get an immediate payout on your policy – the market value which is different than the cash surrender value. The sale of a life insurance policy will undoubtedly help many in the trying times we are facing.
What Happens in a Life Settlement or Viatical Settlement?
When you sell your life insurance policy in a life settlement or viatical settlement transaction, you are entering into a policy sale contract with a life settlement provider who buys your life insurance policy on behalf of an institutional investor. Some of the important things to know about the settlement process include:
- You enter into a sale and disclosure agreement with a life settlement provider.
- You receive a cash payment at the time of the sale of your life insurance policy. Transaction costs are paid by the policy buyer.
- The ownership of your life insurance policy is transferred by the insurance company to the life settlement company (life settlement provider or institutional investor).
- Your loved ones will no longer receive a policy payout when the insured person passes.
- You are no longer responsible for paying premiums. The life settlement company will pay future premiums to the life insurance company.
The sales contracts that are provided to you have been approved by state insurance departments. The life settlement and viatical settlement regulations in most states are based on the model acts issued by the National Association of Insurance Commissioners (NAIC)
What are the Benefits of a Life Settlement and Viatical Settlement?
If you no longer want or need your life insurance policy, a viatical settlement or life settlement provides many benefits. First, you can receive a lump sum cash payment for your life insurance policy that you can use for any reason you choose. Second, you no longer need to pay future premiums on the life insurance policy, allowing you more money for other budget items that may be more important or the ability to invest in another income producing asset that helps you maintain your lifestyle.
Another important item to check is that if your health status is such that you have a chronic or terminal condition that is typically associated with a viatical settlement, your proceeds from selling your policy may be tax-free. In addition, if you use your policy proceeds to pay for long-term care or a qualified spend down for Medicaid eligibility, your proceeds may also be tax-free.
What is the Difference Between a Life Settlement and a Viatical Settlement?
In general, a policy sale is considered a viatical settlement if the insured person has a chronic or terminal illness. All other policy sales are considered a life settlement. For additional information on the difference between a life settlement and a viatical settlement, please refer to this in-depth blog article.
Who is Eligible for a Life Settlement or a Viatical Settlement?
All types of life insurance can qualify for a life settlement: whole life, universal life, variable life, indexed life, and term life insurance. In addition, group life insurance policies are also eligible for a life insurance settlement. The life insurance policy being sold must have a face value (also known as net death benefit) of at least $50,000.
For a viatical settlement, the insured has no minimum age requirement, just a chronic or terminal illness. For a life settlement, the insured should be aged 65 or older, although the majority of life settlement companies focus on insureds aged 75 and older. The underwriting helps determine the age eligibility – the more serious the health issues of the insured, the lower the age that will qualify.
What Can I Do to Get Started?
To take advantage of this option, a life insurance policy owner (who has a policy with a face value of at least $50,000) can contact a state-licensed life settlement provider or life settlement broker, or reach out to one of our experts here at Q Life Settlements who would be happy to answer any initial questions. Then after an initial information submission (along with a policy illustration) the policy can be evaluated for its market value- which is some amount less than the death benefit. A life settlement makes sense when the market value is greater than the cash surrender value (if the policy has any), and there is no longer as great a need to keep the life insurance policy in-force. After completing the life settlement, you receive the full market value of the policy (this can be cash, a “retained death benefit”, or even an annuity or long term care benefit plan) and the policy’s ownership and beneficiary designations are changed over to the buyer of the life settlement. The new owner makes all the premium payments from that point on, and may check in periodically to make sure their records are up to date.
When a life insurance policy is no longer meeting your current needs—maybe the premiums are becoming unaffordable or you just don’t need the same coverage as when the policy was issued—there are three scenarios that may make a life settlement an attractive option:
- Seniors who have been impacted by the recent market trends and no longer have the security that they had planned, a life settlement can be of tremendous benefit. In this scenario, the life insurance premium is likely looking more like an unnecessary bill, so if you are in this boat make sure to look into the policy’s market value before letting an unwanted policy lapse.
- Seniors who are concerned about the future uncertainty may be interested in using a life settlement to get the most value for their life insurance policy now, and then purchase a more suitable product like an annuity.
- For seniors who landed on their feet in all of this, they may be interested in leveraging a life settlement to access immediate liquidity in order to invest back into the stock market to, as the saying goes, “buy the dip” that we are experiencing.
How is a Life Insurance Policy Valued?
There are many factors involved in a valuation analysis of a life insurance policy, including the policy’s death benefit (size of the policy), the health and age of the insured(s), and the type of policy. There are three key inputs that are necessary to determine the value of your policy:
- Age. The older you are, the more valuable your policy is, based on actuarial data.
- Health Status. Life settlement funds review your medical records to complete a medical underwriting. Your health status is a key factor in pricing models. The worse your health, the higher the market price. Health status also factors into a life expectancy review.
- Type of Life Insurance Policy. Is the policy a whole life policy? A universal life policy? A term policy? The type of policy is needed to determine market prices, as future premiums depend on the type of policy.
An estimate can be done based on the amount of the death benefit of your policy, but to get a more precise present value, the policy details are important. The policy details can be determined by reviewing an “in-force illustration” (shows annual premiums) which can be obtained either directly from the life insurance company or your life insurance agent.
Some Pitfalls to Avoid
There are some considerations that you should make sure you check before selling your life insurance policy:
- Tax Implications – you may have to pay ordinary income or capital gains taxes when you sell your life insurance policy. Consult with your financial advisor or other trusted resource to check.
- Loss of Public Assistance – selling a life insurance policy could impact your ability to qualify for Medicaid or other public assistance. The disclaimer or disclosure form that is included with your sales documentation outlines these considerations.
- Get Multiple Offers – make sure that you work with a life settlement provider that will offer your policy to multiple potential buyers to get the best possible offer.
Are There Other Options?
If you want to explore other options for getting cash out of your life insurance policy, such as accelerated death benefits, you can read your policy and associated riders to look for additional information. You can also contact your financial advisor to ask these questions. Alternatively, the experts at LCX Life can help you review those options.
For a qualified senior, life settlements can provide significant value—above and beyond the policy’s cash value. Be sure to keep all of your options in mind as we navigate these turbulent waters together and know that we are here to help! You can get an instant estimate of the value of your life insurance policy by visiting the LCX Life settlement calculator. You can also call LCX Life at 888-388-0988 or email us firstname.lastname@example.org to discuss your situation. Our team is available and ready to explain to you all that you would want to know about life settlements.
Remember: Never let your clients abandon a life insurance policy without looking at the life settlement option first!