Life insurance provides solutions to meet various financial needs. Over time, however, circumstances can change and with them the need for insurance. In fact, nearly 98% of all term life insurance policies never mature in a claim. Life Settlements allow policyholders an option not previously available.
A “Life Settlement” is a lump sum payment to the owner of a life insurance policy by one of many funding sources in exchange for the ownership of the policy. Never before have non-terminal policyholders been able to receive capital in excess of their policy’s cash or surrender value to increase their cash flow.
Generally, anyone over age 65 who has $100,000 or more in life insurance coverage that is beyond the period of contestability may qualify for a Life Settlement. Other factors considered in the negotiations are the policy’s cash surrender values and the cost of premiums. A basic principle to remember is that the older the age of the insured and/or the more health complications that exist, the higher the settlement.
The fundamentals of the Life Settlement transaction have technically been around since 1989 in the form of “Viatical Settlements”. Individuals at any age can qualify for a viatical settlement if they have a chronic or terminal illness such as Cancer or HIV. Viatical Settlements have always been contingent upon the health of the insured, whereas Life Settlements are based primarily upon the age of the insured. In most states, a terminally ill senior applicant will need to use a licensed Viatical Broker and/or Funding Source, in order to abide by state rules and regulations and to retain the tax-exempt status on the settlement.
Example: An 80 year old woman owns a $1,000,000 universal life insurance policy with an annual premium of $26,860 and a cash surrender value of $14,509. In this case, the owner sold her life insurance policy for 8X the cash surrender value or $115,545. Now she is free to stop paying all future premiums and use that money for other necessities that are more important at this point in her life. Please note that often individuals are able to sell a portion of the death benefit for cash as well as retaining a significant permanent death benefit for final expenses with no future premiums being required.
According to industry reports, Life Settlement proceeds are tax-free up to the cost basis (premiums paid since policy inception). They are taxed as ordinary income from basis to cash surrender value and proceeds above the cash surrender value are taxed as capital gains. We recommend that all applicants consult their tax advisor to address any tax concerns.
Once the Life Settlement change of ownership has been recorded with the insurance company and the policy owner has received their money, the Life Settlement Funding Source will continue to pay premiums for the life of the insured. Most types of life insurance qualify including Whole Life, Universal Life, Convertible Term Life and Survivorship Life. We provide this appraisal free of charge and there is no obligation to accept a settlement at any time.
For more information or answers to your insurance questions, contact us at Allan Block Insurance Agency, www.ambins.com, located in Tarrytown, NY in the heart of Westchester County, a key business district near New York City. We write auto, home, renters, condo, co-op, personal, business, life and group insurance for clients locally and in NYC, CT, NJ, PA, MA and many other states. The Professional Agency with the Personal Touch.