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Wanted: Your Life Insurance
Investors are keen to offer "life settlements."
The agent who sold you a life insurance policy could well
now represent investors who want to buy it. A life settlement
will pay you a lot more than you could get from surrendering
it to the insurance company, though the sum will be much less
than the death benefit.
These transactions may appeal to you if your life insurance
needs have changed and you don't need the policy anymore.
Or perhaps you don't think holding the policy is worth the
escalating premiums, which are the result of low interest
rates. But before you grab the money from an eager buyer,
get some good advice from a financial planner, an estate attorney,
or even your doctor.
How the life settlements business works: Settlement firms
are bankrolled by hedge funds, pension funds, and in some
cases large insurers. The settlement firms buy the policies
from individuals on behalf of investors. The settlement company
then acts on behalf of the investors, who become the owners
and beneficiaries, and pays the premium until the insured
dies. The firm collects the death benefit and pays its investors
anywhere from 9% to 12% annual return. Other firms buy and
repackage the policies for sale to other investors.
These deals probably sound a little familiar. They're similar
to viatical programs of the 1990s where the terminally ill,
many of them AIDS patients, sold their policies to investors
to pay medical bills. Life settlement companies, however,
target a different market -- people at least 65 years old
with some health conditions and life expectancies of 2 to
12 years. To qualify for a buyout, their policies must have
death benefits of $250,000 or more.
Should you sell your policy? We asked fee-only life insurance
advisor Peter Katt, principal of Katt & Co. in Mattawan,
Mich., to analyze the numbers for a 72-year-old client who
is considering selling his $1 million universal life policy.
The life settlement company would pay $275,000, vs. the $100,000
surrender value that the insurance company would give. Sounds
good -- but not as good as holding on without paying the premiums.
Katt says you can use up nearly all the cash value to keep
the policy in force -- and then sell it for an estimated $475,000
about five years out. Why so much more? The insured life expectancy
is five years less, and that means the policy purchased can
get paid off sooner. "The longer you wait to sell, the
more money the life settlement firm will offer," says
Katt, who analyzes these offers for about $1,500.
Selling life insurance policies has extremely high
transaction costs. According to a recent report by
Deloitte Consulting and the University of Connecticut, seniors
who sold their policies to a life settlement firm got just
20% of the face value, while the intrinsic value of the policy
is about 64% of the face value. Still, $200,000 for a policy
with a $1 million death benefit may sound good if you think
the policy has no value other than to you or your beneficiaries.
"If a sophisticated investor is willing to pay you for
your policy, you gotta believe it's worth a lot more than
you know," says Byron Udell, chief executive officer
of AccuQuote, an online insurance broker. The high fees, says
Alan Brueger, CEO of Coventry First, help to cover the future
premiums which average 60% of the face value of the policy.
Don't count on the life settlements firm to give you all
the info you need to make an informed decision. Marketing
materials typically compare the settlement offer and cash
value but don't mention what the estate value is if the policy
were held to maturity.
Before you sell, you should be reasonably sure that you won't
need another life insurance policy. If you get married or
go into a new business, you may desire more life insurance
but your old policy will be active and that may limit your
ability to buy more insurance.
Then there are tax issues. Death benefits go to your beneficiaries
tax-free, which is one of the attractions of life insurance.
Selling the policy will result in a tax bill if the settlement
amount exceeds your cost basis.
If you choose to sell your policy, shop for the best price.
Experts recommend getting four bids. There can be a wide range
of bids, due to different actuarial assumptions and the commissions
the settlement companies pay their agents. In short, be as
skeptical when you sell your life insurance policy as when
you buy it.
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