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By Jacques Chambers
Life Settlements are a relatively new financial vehicle that allows people to treat their life insurance policies as a marketable commodity that can be sold for cash.
This article neither recommends nor rejects the concept; however, as with any financial decision, you should understand the process and be aware of potential problems and pitfalls. Do not rely on any one source of information, especially that of a company wanting to buy your life insurance policy. Look to unbiased experts for advice.
A Little History
This industry got its start early in the AIDS crisis, and they were called "viatical settlements." Persons with a desperate need for cash and a very short life span were able to sell their life insurance policies to investors who would pay them cash for the right to own and become the beneficiary of their life insurance policy when they passed away.
For example, if a person had a $100,000 life insurance policy and a six month life expectancy, the investor would give them $75,000 - $85,000 cash, then when the person passed away the investor would collect the $100,000 life insurance benefits.
This created an industry of viatical companies that would purchase policies directly and viatical brokers that would match investors with sellers or companies. It worked out fine for all involved. The insured received an amount of cash that he/she could use for any purpose in the final days, and the investor realized an excellent "rate of return" on their investment when they collected the life insurance proceeds.
However, the development of new treatments for HIV made it virtually impossible to accurately estimate the life expectancy of a person with HIV/AIDS. Some investors are still waiting for their investment to mature (i.e., waiting for the insured to die) so they can recoup their investment.
What had once been a seller's market with companies bidding up the price of these policies has quickly shifted to a buyer's market with fewer buyers and a dramatic drop in amounts being paid for life insurance policies.
Also, wherever there is easy money, unscrupulous operators flock. There has been a wave of fraud, from insurance agents fraudulently writing policies on people already diagnosed with a terminal illness to viatical brokers and companies selling non-existent policies to investors. This has hastened the shrinking of the marketplace and caused the price paid for life insurance policies to drop even further.
The Current Market
In order to survive, some viatical companies have looked to expand their market beyond the terminally ill. The name "life settlement" was adopted and is used generally to describe the same process as a viatical settlement, but now, instead of purchasing the policies of the terminally ill, they are buying the policies of persons who are elderly or have a chronic medical condition, such as HCV.
The price these investors are willing to pay for a life insurance policy is directly dependent on the life expectancy of the insured, since it is the death benefit of the life insurance policy that provides the return of their investment. It stands to reason that the amount being paid for the policies of the elderly and chronically ill are substantially lower than the policies of a person with only six months to two years of life expectancy. In many cases, the offer is less than 30% of the face amount of the policy.
What Life Insurance Can Be Sold?
Almost anyone is a possible candidate for selling their life insurance and most types of life insurance policies are marketable. Some things to be aware of:
The life insurance policy must be at least two years old.
Any kind of life insurance is "sellable"-term life, whole life, even group life, some more than others, however.
The policy should be fairly large. While policies of any size are technically sellable, most companies are interested primarily in policies of $100,000 or more.
The policy should be underwritten by a reputable life insurance company with a solid financial rating.
Alternatives to Life Settlements
Most financial planners will recommend that you explore other avenues before selling your life insurance policy. Use your life insurance as the source of last resort. However, if you have a life insurance policy that you are considering letting expire because it is no longer needed or the premiums are a financial burden, then selling the policy may be a viable alternative. It would make more sense to sell it, even for a very low percentage, rather than just let it expire due to non-payment of premium.
There are also other ways to realize cash from your life insurance policy. Accelerated Benefits is a provision that is on many policies and is designed to provide money for persons dealing with a terminal illness and a short life span, usually twelve months or less. Under this provision, the insurance company will advance from 25% to 50% of the face amount to the insured while still living.
Some types of life insurance policies, called whole life or universal life, contain savings features that may be tapped into either by surrendering the policy or by borrowing some or all of the accumulated savings.
How to Sell Your Life Insurance Policy
Once you have decided that you want to sell your life insurance policy, the first step is to find potential buyers.
Contact your state Department of Insurance to see if viatical or life settlement companies have to be licensed in your state. If so, they will provide you a list of licensed companies. If not, the association website below lists its members, and a web-search for "life settlements" will direct you to many companies.
Contact several of these companies and briefly describe your policy and your medical condition. Those that are interested will send you paperwork to complete.
Note that most of these companies, especially brokers, will tell you that they survey the market so you don't need to. I strongly recommend that you submit the information to more than one company. There is no way to judge the value of your policy given your medical condition except to see what the market is willing to pay for it. You need to get several bids to help determine the market value of your policy.
Once you have decided which companies you are going to consider, contact your state Department of Insurance, the state Attorney General's office, and the Better Business Bureau to see if there have been complaints filed against them.
Upon submitting the initial paperwork to the settlement company, they will:
•Obtain your medical records for review and estimate your life expectancy.
•Confirm the existence and details of your policy with the insurance company.
•Require the current beneficiary to acknowledge the beneficiary change and agree not to challenge it.
What Else Should You Know About Life Settlements?
If you are currently receiving any needs based benefits such as Medicaid, food stamps, or SSI (Supplemental Security Income), the cash you receive for selling your policy may cause you to lose eligibility for these programs.
There are income tax implications. Current federal law makes the money you receive from selling a life policy income tax exempt only if your life expectancy is 2 years or less. If your life expectancy is longer than that, you may owe income taxes on almost the entire amount of money you receive. While you should ask about this with the life settlement company, you definitely should also get some tax advice from a qualified professional before going through with the sale. NOTE: The IRS will be aware of the sale because the settlement company is required to file with the IRS a 1099LTC on each sale. Any attempt or promise by the buying company to avoid taxes could be fraud.
Life settlement companies have different privacy policies. You should ask the settlement company about their policy. Do they give your name to the investors? Who, outside the company, would see information about you, your medical condition, and the sale?
Since the company cannot collect on its investment until you pass away, they will need to keep track of you. Ask how they maintain contact with you. If your doctor agrees, ask the company to obtain updates on you through him or her. You really don't need someone calling you periodically just to see if you're still alive.
Don't let the company rush you or push you into making your decision. Take your time and consider all options. As with any investment, be skeptical of any deal that must be accepted quickly. Many states even require a 15 to 30 day period after the sale during which you can void it without penalty.
Make sure the money to buy your policy is accessible. While some companies may have cash on hand; others will have to take your policy to the investment market and "shop" for a buyer, which can substantially delay the sale.
Insist that the funds be deposited into an escrow account with a reputable, independent financial institution before you sign the final papers. This assures you that the funds are available to complete the sale.
Insist on a timely payment. Once the paperwork is signed, the only further delay would be while the insurance company changes the ownership of your life insurance policy. Once that is completed the money should be available to you within two or three business days. Never accept periodic payments; get the full amount in one lump sum.
This is not a good source of quick cash. Do not expect this process to go quickly. Many companies claim they can complete the process in a month. Given the routine delays in obtaining medical records, getting confirmation from the insurance company and other factors, two to three months may be more realistic.
You can receive additional information on the viatical and life settlement industry from the following websites:
http://www.consumerreports.org/...folder_id
=18151
This a Consumer Reports article on the industry and some of the problems it has had. (You need to subcribe to Consumer Reports to access this file.)
http://www.ftc.gov/opa/1995/12/via.htm
Free copies of the brochure, "Viatical Settlements: A Guide for People with Terminal Illnesses," are available from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W
http://www.viatical-expert.net/
Information for consumers
http://www.lisassociation.org/public
/member_companies/index.html
A listing of member of the Viatical and Life Settlement Association of America
Copyright, (December, 2002) Hepatitis C Support Project / HCV Advocate www.hcvadvocate.org. All Rights Reserved. Reprint is granted and encouraged with credit to the Hepatitis C Support Project
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