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Which of the Following is Not True of Life Settlements?

Which of the Following is Not True of Life Settlements?

A life settlement can be a highly effective way of accessing the value stored in your life insurance policy. But as with any kind of financial service, the details can be more complicated than they appear on the surface.

It's important to know exactly what you're getting into before committing to selling your policy. Here are seven statements about life settlement - which of them are true, and which are false?

1) A Settlement Can Pay More than Surrender 

True. Selling your life insurance policy will usually result in a higher payment than surrendering it to the insurance company.  This is because some policies impose an early termination penalty, which reduces the figure you'll receive when you surrender or cancel, and this can be a substantial amount.

There's no penalty for selling your policy through a settlement, so it's possible to receive a significantly higher sum. However, depending on the value of your policy to a buyer, the actual difference between settlement and surrender can vary from case to case.

2) Most Life Policies Can Be Sold 

True. In theory, almost any kind of life insurance policy can be sold through a settlement, including term life, whole life, universal life, and more.

There are, however, some restrictions. Policyholders should be over the age of 75, and have a life expectancy that is shorter then 15 years. The policy must have a death benefit value of at least $100,000, and the policy must have been active for two years or more.

Whether or not you'll find a willing buyer depends on the potential value of your policy, and those with lower death benefits may not sell quite as easily, or for as high a payment. However, qualifying policies which can't find a buyer are rare.

3) Life Settlements Involve Large Fees and Charges 

Wrong! You might think that there will be fees involved with settlement, but in most cases, neither the buyer nor the insurer will charge you anything. There are no fees involved for the application process, appraisal, processing, or payout.

However, if you arrange life settlement through a broker, financial adviser or other intermediary, they can charge a fee or commission.

4) A Life Settlement is Free from Tax 

Also wrong, unfortunately. While life insurance payouts are tax-exempt for beneficiaries, settling a policy can result in a tax bill.

In general terms, if your settlement payment is greater than the total you've paid in premiums, then the difference will be treated as income and taxed accordingly. Also, if the settlement amount is greater than the policy surrender value, that difference will also be taxed, this time as a capital gain.

However, there's one important exception. If you settle your life policy while terminally ill, or in some cases chronically ill, then the entire payment will be treated as a death benefit, and therefore exempt from tax. These settlements are known as viatical settlements and are subject to strict qualification rules.

5) The Settlement Can Be Used for Any Purpose 

True. There are no restrictions whatsoever on how you can use the money you receive from settlement.

6) A Settlement Cancels My Premium Obligations 

True. Once the settlement process is complete, and the policy is owned by the buyer, your premium obligations end. You'll not need to make any future payments, even if the buyer stops paying the premiums for any reason.

7) A Partial Life Settlement is Possible 

Also true. It's possible to settle a portion of your policy, eliminating any need for future premium payments, but leaving an amount death benefit in reserve to pass to your family.

However, this is a more complex procedure than a regular life settlement, so seek expert advice to see whether the figures will work out for you.

 

Stephen E. Terrell

Stephen E. Terrell is president of Life Guide Partners. He may be contacted at stephen@lifeguidepartners.com.