Don't Cancel, Sell Your Life Insurance
Selling an existing life insurance policy is no longer a new concept; it is a financial planning reality. Estate planning attorneys, trustees and financial planners are recognizing the power of this alternative for their clients. It’s is a revolutionary shift in how life insurance assets are managed. Instead of accepting the life insurers’ nonforfeiture options, advisors are now having their clients’ policies reviewed to explore their market value. The information provided by these valuations can help policyowners use their capital more efficiently.
Why would you sell your life insurance?
You no longer have a need. Perhaps your beneficiary(s) have predeceased you or you are no longer required to provide for dependents. Maybe your children are grown and financially successful and you’d rather use the money yourself.
You are over-insured and you no longer need the same level of insurance coverage.
You can no longer afford the premiums. If you can’t continue to pay the premiums on your policy due to cost, selling a policy is a great way to get some cash and eliminate the future premium costs.
Your Term Policy is nearing its end. If you have a 20 or 30-year term policy that was designed to cover a specified period, you may no longer want to continue the policy under the policy continuation provisions. You may be able to recoup the premiums you paid. If there is a conversion privilege, you can work with a viatical/life settlement provider to convert the policy and sell it. Don’t let a term insurance policy expire without considering your options! (Be sure to start the process at least 6 months before the policy term ends.)
You Need Money. Perhaps you need the money more than your beneficiary(s). Unanticipated costs creep up as we age. You may have retirement income or health care issues that can be mitigated with extra cash. If your needs outweigh those of you beneficiary, then selling a policy may be the right choice.
Rising premiums – if the cost of the premiums have increase and you can’t/don’t want to pay the higher costs.
Business owned policies can also be sold.
If a partnership has dissolved;
A key employee has retired and coverage is no longer needed;
“Vanishing” premiums have not vanished;
The business is/has been sold or is dissolving.
HOW MUCH CAN I GET?
Policy owners can typically receive more money than they would otherwise get if you cancelled or surrendered the policy, but less than the death benefit. The range of value is wide depending on a number of factors such as policy type, premium and life expectancy of the insured. We typically see values 40-80% of the policy death benefit. Ideal candidates are insureds that are age 65 or older with a life insurance policy death benefit of at least $100,000 and with a life expectancy of up to 20 years.
There are two type of transactions life settlements & viatical settlements.
In a viatical settlement, an individual who is terminally or chronically ill sells his or her life insurance policy to a viatical settlement provider. Individuals who are terminally or chronically ill often consider selling their life insurance policies in order to access funds to pay for medical care and living expenses. In general, amounts received by a terminally ill individual as part of a viatical settlement are not subject to federal income tax. Amounts received by a chronically ill individual as part of a viatical settlement are not generally subject to federal income tax, provided the funds are used to pay for incurred qualified long-term care services.
A life settlement is the sale of a life insurance policy by the policy owner (who is not terminally or chronically ill) in exchange for a lump sum greater than the policy's cash surrender value but less than the death benefit. The company that buys the policy will continue the premium payments necessary to maintain the policy, name a new beneficiary, and eventually collect the death benefit upon the insured's death.
Viatical settlements are available only to terminally ill or chronically ill individuals. To be considered terminally ill for purposes of a viatical settlement, an individual must be certified by a physician as having a life expectancy of 24 months or less. A chronically ill individual is an individual who has been certified by a health-care professional as unable to perform at least two activities of daily living for a period of at least 90 days due to a loss of functional capacity, or if the individual needs substantial supervision for that individual's own protection due to cognitive impairment. Terminally or chronically ill individuals who enter into viatical settlements with properly licensed viatical settlement providers are not subject to federal income tax on proceeds that result from the viatical settlement. In contrast, life settlements are not restricted to terminally or chronically ill individuals, and proceeds are not free from federal income tax.
If you think selling your life insurance policy may make sense let us know and we’ll walk you through the process and discuss the pros and cons.
Here is how the process generally works:
A completed questionnaire and authorization are submitted to one or more settlement providers along with carrier illustrations and the insured’s medical records for the last five years.
Providers will evaluate the policy to determine if an offer can be made.
Providers relays the offer to the advisor.
Once an offer is accepted, settlement providers will issue closing documents.
After receipt of the completed closing documents, the change of ownership and beneficiary forms are sent to the life insurance company.
Upon confirmation that the change forms have been processed by the carrier, funds are released to the seller.
FIVE SAMPLE CASES
1) INSURED Female age 94 FACE AMOUNT $1,900,000 (TRUST OWNED)
POLICY Universal Life CASH VALUE $8,939
The policyowner and her husband took out the policy as part of their estate plan for their children. After living with cognitive impairment for a very long period of time, neither the Trust nor the family had sufficient funds to pay the increasing premiums which would soon exceed $100,000 annually. The sale provide the beneficiaries with $1,100,000 tax free where they would have otherwise received nothing.
2) INSURED Male age 72 FACE AMOUNT $1,500,000
POLICY Term CASH VALUE $51,453
The policyowner, a single father, took out a term policy years ago to provide income protection for his daughter. Once his daughter was married, he no longer needed the coverage and was planning to lapse the policy. The sale provided the policy owner with $20,000, where he otherwise would have received nothing.
3) INSURED Male age 80 FACE AMOUNT $500,000
POLICY Universal Life CASH VALUE $28,356
The policyowner purchased a life insurance policy to provide protection for his family. Since his children were now grown with families of their own and he maintained additional coverage, the need for these policies no longer existed. The sale provided the policyowner with $110,000 which he used to supplement his retirement and plan a family vacation.
4) INSURED Male age 70 FACE AMOUNT $1,080,676
POLICY Whole Life CASH VALUE $0
Settlement: $150,000 cash with a $50,000 retained death benefit.
A successful business owner took out three policies to provide income protection for his wife. After deciding to pass the business down to his son, there was an unfortunate falling out within the family. The policyowner and his wife were left with no income and could no longer afford to keep the policies in force. With the Retained Death Benefit option, the settlement provided the policyowner with $150,000 in cash and a $50,000 death benefit with no future premium obligations.
5) INSURED Female age 53 FACE AMOUNT $1,000,000
POLICY Term CASH VALUE $0
The policyowner took out a term policy to provide security for her daughter. After being diagnosed with a serious illness, she wanted to spend more time with her daughter and needed some help covering her medical expenses. The sale provided the policyowner with $81,500, where she otherwise would have received nothing. She used the proceeds to cover her expenses and enjoy time with her family.
This document is provided by Herr Capital Management, LLC is educational in nature, is not individualized, and is not intended to serve as the primary basis for your investment, financial or tax-planning decisions.
Herr Capital Management, LLC - Where Prosperity Begins © 312-697-1600 Securities offered through American Portfolios Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Herr Capital Management, LLC, a registered investment advisor independent of American Portfolios Financial Services, Inc. Investment products are not FDIC insured and involve investment risk including the loss of principal invested. Please consult your tax consultant for tax advice.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017 Used with permission.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.