Factors to Consider When Deciding to Sell Your Life Insurance Policy
Life settlements have proven profitable not only for institutional investors that purchase policies, but also for the providers and brokers who handle these transactions. As a result, competition among life settlements providers for individuals seeking to sell or otherwise terminate their life insurance policies has become increasingly intense. Because the life settlement industry is relatively new and may target seniors who may be in poor health, it can be prone to aggressive sales tactics and abuse.
That does not mean that you should never consider a life settlement. A life settlement might make sense for you if you no longer want or need your current policyâ€”or if you can no longer afford the expense of paying insurance premiums and are willing to give up or replace the coverage. Even then, however, you should proceed with caution. Here are some of the key factors you should consider:
* Ongoing Life Insurance Needsâ€”If you are considering buying a new policy with the proceeds of the life settlement, you will need to determine whether you will be able to get a new policy with equivalent coverageâ€”and at what cost. Your old policy will still be in force and may affect your ability to get additional coverage. Even if you can get a new policy, you may have to pay higher premiums because of your age or changes in your health status. If your goal is to retain coverage but lower the premiums you pay or otherwise obtain different features, you might want to consider options such as reducing your existing amount of policy coverage or making a "1035 Exchange."
If you're thinking of switching from one life insurance policy to another, you should consider whether a "1035 Exchange" would be more beneficial than a life settlement. Depending on your circumstances, if you opt for a life settlement, you may have to pay taxes if the cash surrender value of your policyâ€”or the amount of a life settlementâ€”exceeds the premiums you've paid.
The Internal Revenue Service allows you to exchange an insurance policy that you own for a new life insurance policy insuring the same person without paying tax on the investment gains earned on your original contractâ€”which could be a substantial benefit. Because this is governed by Section 1035 of the Internal Revenue Code, these are called "1035 Exchanges." But there are other factors you should consider when deciding whether to exchange your policy, including potential loss of death benefits. For more information and a list of questions to ask, see NASD's Investor Alert entitled Should You Exchange Your Life Insurance Policy?
* Less Costly Alternativesâ€”If one of the factors driving your decision is a need for cash, be aware that surrendering your life insurance policy for its cash value or pursuing a life settlement are not your only options-especially if you would ideally like to retain your coverage. For example, you might want to see whether you can borrow against your policy. You might also be eligible for accelerated death benefits, which allow an individual with a long-term, catastrophic, or terminal illness to receive benefits on his or her policy prior to dying. Check with the company that issued your policy before leaping into a life settlement. You may still decide that a life settlement is the best alternative for you, but you should be aware of all of your options before making up your mind.
* Difficulty Determining Fair Pricesâ€”One of the hardest things to know when you are selling a life insurance policy is whether you are getting a fair price for your policy. There is no transparent secondary market for life insurance policies. The best way to make sure you are getting a fair price is to shop around. This can mean directly contacting multiple life settlement companies, using a licensed life settlement broker who will shop your policy around on your behalf, or contacting your broker or other financial services provider.
* Impact on Your Financesâ€”A cash payment from a life settlement can have unintended financial consequences, especially if your financial circumstances have changed from when you first bought the policy. For example, if you currently receive state or federal public assistance, such as Medicaid, a life settlement can negatively impact your ability to participate in that program. Before you proceed with a life settlement, be sure you fully understand the financial implications for you and your family. You may want to consult your attorney, accountant, or other legal or financial professional.