As Benjamin Franklin’s said – “Nothing is certain except death and taxes.” If you own a life insurance policy, and continue to make premium payments on time, the life insurance company will be expected to pay out the face value of the policy, less any liens or advances paid. This only applies to cash value policies – such as whole life insurance, universal life insurance, variable life insurance or equity-linked life insurance, as most term policies are either for a limited period of years (for example,10 or 20 years), or become nonrenewable after a set age, such as 75 or 80.
In recent years a mini-industry has developed in which professional investors will agree to buy already existing life insurance policies from policy owners for immediate cash. The policy owner receives money up front and no longer has the obligation to make premium payments. The investor buys the policy for a single cash payment and then continues to make the premium payments waiting for the insured person to die. The buyer takes over all incidents of ownership to the policy and becomes the registered owner with all rights to name beneficiaries.
How Much Can You Get?
How much can you be expected to be paid for your life insurance policy depends on a combination of the nature of the policy, the face amount of the death benefit, your actual expected life expectancy, the amount of premium that has to be paid each year, and how good a negotiator you are.
Where the insured has a life expectancy — because of illness or other medical condition of less than two-years — it is considered a “viatical” settlement. If the life expectancy is longer than two years, it is known as a “senior” settlement.
Generally the sicker you are and the shorter your life expectancy, the more you can be expected to recover as a percentage of the face amount of the policy. All things being equal, a proposed buyer will want to review medical records and perhaps have you examined by a physician (the event is the polar opposite of when you buy a life insurance policy, where the life insurance company wants to make sure you were healthy). In the case of life settlements, the buyer becomes happier when your situation is direr, and they thus contemplate a shorter period of time during which they have to make premium payments until they collect the lump sum death benefit.
Watch Out for Crooks
As the viatical and life settlement business is relatively new, it has attracted more than its share of crooked players at every step of the process. Individual insurance agents (including perhaps the agent from whom you bought the policy originally) can earn hefty payments (sometimes a percentage of the face amount of the policy) for finding a person willing to sell the policy to the viatical or senior settlement broker. Some agents and brokers exaggerated the illness or medical condition of the insureds to generate higher buyouts, and some brokers found dishonest medical examiners who were all to eager to exaggerate and say the life expectancy of the insured was short and he or she was in dire condition, knowing that an overly pessimistic life expectancy would fetch a higher price from investors. Not to be outdone are the investment solicitors who are paid large commissions for bringing in funds to invest in life or viatical settlements, often by exaggerating the financial returns investors could expect on the policies they bought.
To be eligible for a viatical or life settlement a policy must typically be sizeable as no viatical or senior settlement company is interested in buying a policy with low face amount, as it costs just as much to value the policy and assess the life expectancy of a person with a $5,000 policy as one with a $5,000,000 policy.
Yet if you are the owner of a substantial life insurance policy, particularly one with cash value that can be maintained through the person’s lifetime, and you need money for long-term care needs, selling a policy to a life settlement or viatical settlement firm may be an attractive option. In some cases, it is possible to sell a portion of the policy – such as half the face amount — maintaining the rest for your family’s needs.
If you are considering selling your life insurance policy as a senior settlement, contact numerous potential buyers as the prices they are willing to pay are likely to vary dramatically.
Do You Need to Watch Your Back?
One additional thought might give you pause. Let’s say, you sell your policy to Investor X. The faster you die, the more Investor X makes. For example, let’s say there is a $1,000,000 policy on your life, and it carries an annual premium of $30,000 a year to keep it in force, and you sell to Investor X for $350,000. If you were to die tomorrow, Investor X will collect the $1,000,000 from the life insurance company and have a gross profit of $650,000 – almost twice what you were paid. Even better, Investor X did not have to fork over any premiums to keep the policy in force.
If you die ten years later, Investor X will have had to pay $300,000 in premiums to keep the policy in effect and will have been unable to use the $350,000 he paid you for the ten years. It may still be an attractive investment, but not nearly as attractive as if your death had occurred sooner.
While it is unlikely that an institutional buyer of a life insurance policy will act to “bump” you off, you should be aware that the real life-equivalent to the “Sopranos” of TV fame just may decide to enter the life settlement business.
Rather than sell your policy to an outside organization, you might be able to sell your policy to a family member who cares about you. This may provide you both a higher return and peace of mind – enabling you to pay for long-term care expenses without worrying if the buyer is in league with the Soprano family.