Crawford Frazer
Have you ever thought about all the money you put into a life insurance policy and wondered whether it was worthwhile? You may, for example, have wanted to provide security for your children, but now they’re financially successful, with families of their own. Or maybe you’re struggling financially and you need money to pay the bills. Some policyholders are trying to get those years of premium payments back in the form of life settlements.
What is a life settlement?
Essentially, a life settlement, also called stranger-oriented life insurance, lets you sell your life insurance policy to someone else, usually a company that specializes in these kinds of transactions, according to the Financial Industry Regulatory Authority (FINRA). Then, the life settlement company will sell your policy to other investors, who get the payout when you die.
Policyholders usually can get more through settlements than they can by surrendering their life insurance policies back to their insurance companies, according to AARP. The amount they get usually falls somewhere between the “surrender value” they could have gotten from their insurer and the full benefit amount.
Caution!
The process sounds pretty simple. Unfortunately, there are consequences to life settlements for sellers and investors alike. For one thing, if the life settlement company you’ve invested in is disreputable, your state could shut it down — and you may not ever see that money again. Moreover, groups like the American Council of Life Insurers (ACLI) warn that the industry is rife with fraud, and state lawmakers are attempting to impose tighter regulations.
AARP points out some other reasons for concern for people selling their life insurance policies:
- Extra costs. When you receive your money after selling your policy, there are probably tax consequences, and your payout also might get reduced by broker’s fees.
- Privacy concerns. Not only will your health information be shared with investors, but life settlement companies also will be able to check up on you regularly after the settlement.
- Future policies. If you decide you want another life insurance policy, you may be out of luck. Your life has a maximum amount for which it can be insured. And even if you haven’t reached that ceiling, the cost of a new policy at your current age and health may be extremely high.
- Fairness. Commissions may be as high as 30 percent for this kind of transaction, so you should expect that brokers will aggressively pursue you and try to make a deal that benefits them.
- Medicaid. A life insurance settlement may give you some much-needed cash — but, if you get too much, you may no longer qualify for Medicaid.
Consider the alternatives
If you need (or just want) that additional money, there are other choices available, as both AARP and FINRA point out. If you’ve had a life insurance policy for years, you usually can borrow against it. Alternatively, if your financial need arises from a terminal illness, you may be able to get an early payout if your policy has accelerated death benefits.