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Questions and Answers about Life Settlements
Let us take a closer look at the advantages and disadvantages
of these transactions, for seniors and for investors.
Should I sell my life insurance policy?
It can free up a lot of money that you otherwise have tied
up. It allows you to liquidate an asset. To unfreeze your
money.
On the positive side, selling is obviously a good way for
someone to ease financial burdens caused by medical bills
and other obligations. Being under financial strain has significant
quality-of-life consequences, and easing that strain is the
primary goal of many viators. For some patients, money derived
from the sale of a life insurance policy may even result directly
in an extension of their lives as they are able to seek alternative
or additional medical care.
Another benefit of life settlements is that, after meeting
any obligations, there are no constraints on how the proceeds
from the sale are spent. While you may want to devote the
money to current or future medical expenses, you could also
buy a crate of diamonds and cigars.
There are also drawbacks. The obvious one is that your beneficiaries
no longer receive payment upon the your death. Presumably,
if you bought a life insurance policy, you at one time had
someone in mind who would need financial support in the event
of your death. Of course, it may be the case that your children
have are grown up, for example, or that your financial circumstances
have otherwise changed so that the original beneficiary of
the policy will not have to depend on it.
Also, selling your life insurance policy may result in complications
of your financial picture that cause you serious headaches.
If you suddenly acquire a large sum of money, you’ll probably
lose any Medicaid benefits or other form of federal assistance
which you are receiving. While people with life expectancies
of less than two years are usually exempt from paying federal
income taxes on proceeds from viating, those projected to
live longer are not exempt, and may find themselves mired
in a complicated tax situation. For this reason, you may wish
to consult a tax professional before selling your life insurance
policy.
Another potential downside is that there is little regulation
of this industry, and the consumer protection laws that apply
to many financial transactions do not extend to life settlements.
That doesn’t mean life settlements are not necessarily unscrupulous
of that the people you will be dealing with are out to cheat
you - life settlements are usually perfectly legitimate –
but that
Sellers might be manipulated into accepting less than the
market value of their policy, for example, or the payments
might arrive on a “creative” schedule, or they might find
that their sensitive personal information has been given out
without their consent.
If you are thinking of entering a life settlement agreement,
find out whether your state requires companies that buy policies
companies to be licensed. If so, you should work with a licensed
company. You can also call the Better Business Bureau and
state insurance commissioner to see whether complaints have
been filed against a given company.
A final consideration, which may sound slightly paranoid,
is whether you want someone with no personal ties to you having
a vested interest in your death.
That is a lengthy list of drawbacks, but should not be taken
to mean that life settlements are necessarily a bad idea.
A trustworthy and knowledgeable financial advisor may help
you think clearly about these matters, as well as a close
friend or family member.
Should I invest in a life settlement?
Again, the short answer is: It depends.
For any investment, you should consider how comfortable you
are with the idea from an emotional perspective. Investing
in a life settlement can be considered, in a sense, speculating
on someone else’s death, which may strike you as morbid. On
the other hand, you may consider it a mature response on the
part of the investment community to the problem of terminal
patients facing financial difficulties. You may even think
of it as a socially responsible investment, in that you are
helping a person in need. Or you may not have a particularly
emotional reaction to the idea at all.
Also, if you do decide to invest in a life settlement, proceed
with caution. Investors have also been a victim of fraud in
the viatical industry on numerous occasions. In 2000, a Consumer
Reports study of 73 viatical companies found that 33 of them
had gotten into legal hot water in the prior two years for
a range of dubious practices. For example, investors may not
receive any proof of purchase of a life insurance policy they
pay for, or they may be misled about the extent to which a
longer life span of the viator can drastically reduce their
rates of return. Again, since the industry is not regulated
in many states, it can be difficult to prevent these abuses.
Among hospice financial counselors who have had experience
with viatical settlements, most report positive experiences.
Selling
Your Life Insurance Policy
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