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| Sell Settlement |
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."
Insurance companies generally urge customers to examine all options with their policies before they decide to sell.
Scams to be aware of
Since it is a fairly new industry, the life settlement business is not heavily regulated. The Viatical and Life Settlement Association of America (VLSAA) advises policyholders searching for a life settlement company to ask the company if it's licensed. If policyholders are not using a broker, they should negotiate with several provider firms to determine the market for their policy.
Here are two well-publicized scams to avoid if you are considering selling your life policy:
"Wet paper." This is when an investment company induces an older person to buy a life policy. The policyholder then turns around and sells it to the company within only days or weeks.
"Cleansheeting." This is when someone partners with an investment firm to "doctor" their medical report to improve their health on paper, and then buys a life insurance policy they otherwise would not have been able to get, for the purpose of selling it to an investor.
Such scams and others have prompted several states to crack down on life settlement fraud. Jim Terlizzi of Peachtree Settlement welcomes such oversight. "We are very much behind the regulatory push," Terlizzi says, "with the developments in the market there are some bad actors out there and we don't want to be painted with the same brush."
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