Unfortunately, most people are not even aware that there may be an option to sell a policy. With a few exceptions, insurance carriers, which benefit from lapses in life insurance policies, don't inform policy holders of the life settlement option.
Best Practices For Selling A Policy Before selling a policy, policyholders need to consider whether it makes sense to do so. In doing so, a policyholder should answer these questions:
1. To what extent do my beneficiaries need the death benefit from the policy?
2. Are the policy's premium payments affordable?
3. Is there cash value in the policy that I could use to make the premium payments?
4. If the premium payments are not affordable, do my beneficiaries want to pay the premiums so that they can keep the death benefit?
How Much Is The Policy Worth?
There are many factors that determine what a buyer will pay for a policy. These factors include:
· The death benefit
· The age and health of the insured (in general, life settlements buyers are interested in buying policies where the insured's life expectancy is less than 15 years)
· The premium payments
· The amount of loans taken out under the policy, if any
Selling an insurance policy may give rise to taxable income, which would reduce the net proceeds to the policyholder.
How To Sell A Policy
There are different types of buyers of life settlements ranging from individual investors to institutions. In general, a policyholder can sell a policy to these investors directly or via a life settlement broker.
Life settlement brokers have a fiduciary responsibility to get the best price for the policy owner. However, life settlement brokers take a percentage of the selling price (up to 30%) or a percentage of the death benefit (between 6% and 8%).
Some life settlement investors will buy policies directly from policyholders. While this may eliminate the broker's fee, these investors do not have a responsibility to ensure that the policy is sold at the best price.
It's a good idea for policyholders to speak with more than one broker or investor to ensure they're getting a top dollar for their policy. Keep in mind that "online calculators"and estimates provided by brokers or investors are, at best, a rough guess as to what the policy is worth and are not to be relied upon.
A life insurance salesperson can be of assistance in selling a policy as well. Note that some life insurance salespeople are more familiar with life settlements than others.
Note that some states regulate life settlements and those states' department of insurance may provide important additional information that sellers should know.
The life settlement process can take two to five months during which period the policy must be kept in-force. Also, the life settlement process requires the policyholder to provide information about the policy and access to the insured's medical records.
When Is A Life Settlement The Right Option?
On the one hand, a life settlement improves cash flow by providing a lump sum payment and eliminating future premium payments. On the other hand, selling an insurance policy means that the beneficiaries will not receive the death benefit.
As the baby boomer population has been going into retirement and the awareness of life settlements has increased over the past few years, tens of thousands of policy holders have sold their policies. The decision to sell a life insurance policy is typically a difficult one. However, with the knowledge of life settlements, policyholders have an additional option to consider to help meet cash needs.
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