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Insurance: When Life Insurance Is A Pot of Gold

Aug 17, 2007
Don't cancel your life insurance policy without reading this first! Depending on your situation, you may be losing tens of thousands of dollars if you do. If you have a life insurance policy that you no longer can afford or need, consider selling the policy. Read on to find out how.

Lots of investors have life insurance. Most people think the only way to collect on a life insurance policy is to die first. But there's another way to benefit financially from a policy while you're still alive and kicking. It's called a life settlement.

There are a lot of companies that buy life insurance policies. These companies aren't buying policies to do you a favor; they buy them as an investment.

When they buy a policy, they pay you up front and take over payment of the premiums. The amount they pay will vary on several factors, but usually averages to about 15% of your policy's face value. You benefit by getting more money out of your policy than if you cancelled it or surrendered it.

Not every life insurance policy can be sold. In general, the policy holder usually has to be age 55 or older with a life expectancy between 2 and 12 years. The insurance policy has to be transferable. It must be a universal life, variable universal life, second-to-die or term life policy. Face amounts need to be at least $100,000.

Several changes in your life could cause you to consider a life settlement. Estate tax law revisions might mean your heirs no longer face a hefty tax bill at your death. Perhaps your universal life premiums have become too expensive for you, or maybe you no longer have to worry about replacing your income.

In these situations, you have several options. You can view your policy as an investment and keep it. You may be able to lower your amount of coverage. You can let it lapse or surrender it for its cash surrender value. But sometimes a life settlement is a better solution.

For instance, because of estate tax law changes, a lady in her late eighties no longer needed her universal life insurance policy. She didn't want to keep paying the premiums on her $600,000 policy. Instead of canceling the policy for the $518 cash surrender value, she sold it instead for $80,000.

A recently-retired gentleman had a universal life policy for $1,000,000. He became very ill and was having trouble paying his medical bills. He passed on the $2,128 cash surrender value and collected just over $100,000 through a life settlement instead. This allowed him to pay for the medical care he desperately needed.

Keep in mind, though, that these people received far less than if they held the policy until death. For those considering a life settlement, there are a few words of caution. Be aware that the commissions on life settlements can be as high as 33%. These commissions are negotiated between the advisor and the purchasing company, but are not always disclosed to the client. If your state doesn't require such notification, make sure your advisor clearly states their cut.

Have your advisor show you offers from several companies. You will want to know the gross offer, the commission and the net amount you will receive. An advisor may recommend a company based on which pays them more, not you.

Beware of advisors who approach you about life settlements. In this case, it's far better to be the pursuer than the pursued.

There is a big difference between selling your policy and buying someone else's policy as an investment. I don't believe any small investor should buy someone else's life insurance policy as an investment. These were sold as 'viaticals' over the last several years and many took the bait to their regret. Don't buy a viatical!

Life settlements aren't for everyone. You need to make sure your life insurance needs are properly met and you've carefully considered all the pros and cons before making your decision. But in some circumstances, a life settlement can be a wonderful way to dip into the pot of gold sitting in your life insurance policy.
About the Author
Nationally-syndicated financial columnist and Certified Financial Planner Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He will answer your financial question FREE at http://www.guardingyourwealth.net
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