Things to consider before pursuing a life insurance settlement...


life insurance fraud

There's a lot to think about before getting a life insurance settlement, such as your health, your finances, your "insurability," and getting a new policy. Here are a few things to discuss with your life settlement broker before going down this road.

Life Insurance Settlement Issue 1: Your Health

Life insurance companies and life settlement investors have strict health guidelines that may prevent you from being able to sell your existing policy or securing a new one. Thus, the first thing to consider in your life insurance settlement is your health.

If you will still need life insurance after your settlement, make sure that your health does not preclude your eligibility for a new policy before you sell an existing one. You also need to make sure that your health situation does not result in your policy being unattractive to possible life settlement investors.

A life settlement advisor can help you determine—quickly and at no cost to you—whether or not your health will be an issue.

Life Insurance Settlement Issue 2: Financials

In most every financial transaction, the market plays a big part. But your life insurance policy value will not be impacted by current economic conditions or the stock market. The only real financials you need to take into account are your own.

And one of the biggest financial issues is insurance premiums. Many people pursue a life insurance settlement because premiums no longer "cost out" or they become simply unaffordable. It's a matter of weighing the long-term value of your policy and estate planning needs against your short-term financial needs.

Often, many seniors find that a large life insurance policy—and the premiums that come with it—is no longer critical to their security and that of their family.

They will often pursue a life insurance settlement on an existing policy, thereby increasing money on hand. They can then acquire a more cost-effective policy, which reduces monthly out-of-pocket expenses but maintains a suitable amount of life insurance.

Also, your life insurance settlement profits are taxable, and you should make sure that said profits significantly outweigh the sum of your premiums paid (known as the "basis").

Ask your life settlement broker to evaluate your policies and finances to see if it's the right time for you to pursue a life insurance settlement.

Life Insurance Settlement Issue 3: Insurability

Your life settlement does not—in the industry's eyes—mean you are any less insured. It means only that the beneficiary of your policy has changed. Just as banks will limit the amount of money one person may borrow, so does the insurance industry limit the amount for which one person may be insured.

As you may know, it's never a good idea to be without coverage. And if you're simply looking to "refinance" your life insurance (i.e., switch to a policy with better terms and premiums), a settlement may not be the way to go.

If your policy has a significant cash value and a better policy is available to you, then a tax free exchange—known as a 1035—may be the best choice. Rather than pursuing a life settlement (on which taxes and fees would be owed), you can conduct a 1035 tax-free exchange and roll over the cash value from your old policy to buy a new one.

Consult with an insurance agent or your life settlement broker and learn your "total insurability" and whether or not a 1035 may be right for you before moving forward.

Life Insurance Settlement Issue 4: The Industry

Life insurance settlements are generating a tremendous amount of interest throughout most every tier of the financial and insurance sectors. And with this interest come hundreds of opinions and recommendations from brokers, analysts, and others—all of whom typically have a vested interest in how you should handle your life settlement.

It's of critical importance to discuss the issues with a life settlement broker before moving forward in any way. Laws change and vary from state to state, so be sure your advisor is both knowledgeable, experienced and reputable.

An experienced life settlement agent will help you better understand life insurance settlements pros and cons, and empower you with the knowledge you need to make the right decisions. These decisions will impact yourself and your family and should be made carefully.


About the author:

David Mickelson, ChFC, AEP is an expert in wealth strategies for seniors. He has helped hundreds of seniors with life insurance, life settlements and all aspects of estate planning.





Food for Thought

A life settlement is a major financial decision with far reaching effects on your finances. Make sure you have considered all the angles and received sound professional advice before you make your decisions.


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