LIFE INSURANCE SETTLEMENTS 101 – NEW REASONS to buy LIFE INSURANCE TODAY
Part 2 – Read Part 1 in the series for the History Of Life Insurance Settlements
Traditionally, life insurance policies are purchased in concert with a major life occurrence:
A marriage, the birth of a child, the purchase of a home, formation of a business partnership.
Conversely, life insurance policies are often given up for these reasons: a divorce, children graduate college, a mortgage is paid off, a business partnership dissolved or the death of a partner. Perhaps the premiums are getting too expensive or the life insurance is no longer needed.
Although life insurance was created to financially benefit the beneficiaries after a death, today these same policies can benefit the insured while they are still alive. Since the early 1990s the option of selling an in-force policy has been available.
Rarely are people aware that when situations change, and they may need some financial relief, their policy can be sold for its current cash value on the secondary market. Most do not know that a secondary market for in-force life policies even exists.
A New Reality
The new reality is that the original reasons for buying life insurance – to protect others when the insured dies – has been expanded upon. Now you can consider life insurance as a planning tool should you become ill or should your situation change…it is something you can collect on while you are still alive.
The industry providing this option is called the LIFE SETTLEMENT INDUSTRY. It is not the insurance industry, nor does the money come from the insurance companies. The amount of money available is always discounted from the death benefit and always more than any cash value, and is determined on a case by case basis.
There are two kinds of Life Insurance Settlements:
Life Settlementsare for people over 65 who no longer need, want or can afford their policies. Life settlement providers are currently seeking life expectancies (LEs) of 25 months to 15 years as a general rule of thumb. Therefore, if someone is 70 years old, in order to fit the criteria, they would have to have some serious but not terminal health issues, while an 85 year old in relatively good health may qualify immediately.
Viatical Settlements are for people of any age who have been diagnosed with a terminal illness and expected to live 24 months or less. The cash settlements obtained from a viatical settlement are far greater percentage wise because the anticipated receipt of the death benefit to the provider will be sooner than if it were a life settlement, with a longer LE.
It’s important to understand that when a policy seller is living with a serious, chronic or terminal illness, and is expected to live longer than 24 months, even though they technically do not qualify, it behooves them to have a life settlement specialist evaluate it. To be more specific, in situations such as this, I strongly recommend you speak to someone well versed in viatical settlements.
The Life Insurance Settlement Process
The actual process of selling a policy for both viatical and life settlements is the same. The criteria, payouts, State regulations, providers, funders and tax ramifications, among other things, are different. All of this goes to why it’s important to choose a life insurance settlement specialist and not a life insurance agent to represent you in the process.
To locate an appropriately experienced life settlement broker, look for a settlement specialist who has been in the business since the viatical days. i.e.: find a company that was established and immersed in the viatical settlement business (before 2000) and did not get into this only after life settlements began.
An experienced viatical/life settlement broker understands that they are providing a compassionate service first and foremost. That’s why we got in the business in the first place, to help people living with a terminal illness, at a time they needed help the most and to ensure they were protected.
Keep in mind when choosing representation that there are both compassion- and commission-driven people providing life and viatical settlements. Research and choose wisely.
Viatical settlements are to be considered a compassionate resource for the terminally ill while life settlements are more of a strategic business decision, typically conducted by more business savvy and older folks.
There is no denying that many life insurance agents are commission-driven. Indeed, that is how they are trained. But reasons for selling a policy on the secondary market are the exact antithesis of reasons for buying that policy in the first place. It can, and until recently, been considered a conflict of interest by the California Department of Insurance! This is why I strongly recommend life insurance settlement specialists, not life insurance agents, be chosen to manage the process for policy sellers.
Common Disclosures: Anyone selling a policy should discuss the tax ramifications if any, with their accountant, tax or other financial advisor. The Health Insurance Portability & Accountability Act of 1996 (HIPAA) made the proceeds of a viatical settlement tax free provided they a) have a LE of 24 months or less and, b) use only licensed viatical brokers and providers should their state require it. It’s also important that any proceeds may interrupt an means-based entitlements you may be getting like food stamps.
It’s imperative to keep in mind that no matter how simply I may be able to describe it here, this is a very complex process within an industry of many layers. As one of the very first viatical settlement brokers in the country and a long time (20+ years!) respected member the industry, I consider myself a consultant first and a broker only when selling a policy is the best option for my client, the policy seller. Example: I often recommend something other than selling an entire policy as is evidenced in this Chicago Tribune article. I, and all whom work with me, are compassion driven, not commission driven. We will never put our own interests before those of the people who put their trust in us.