When are Life Settlements the Wrong Choice?

use life insurance settlement

   Although life settlements are an exceptional financial tool that has provided a sound financial solution for many people, they are not always the right choice.  There are a number of circumstances that come into play when considering a life insurance settlement that have a bearing on the decision whether or not to proceed with the sale.
  
Life insurance is a very important asset for seniors to own. If a life settlement would leave a person without any life insurance coverage or the ability to buy new insurance then it may well be the wrong choice.  An individual’s medical and financial status are often the determining factors in the viability of a life settlement or life insurance purchase. 

There is also the case of using up one’s ‘total insurability.’ Just as banks will only lend an individual a certain amount of money, so too will insurance companies limit the amount of coverage they will provide.  In a life settlement, the policy is still in force, applying toward the insured’s allowable total coverage. There may not be enough additional coverage available to warrant the settlement.

 

The Economics of a Life Insurance Settlement

If the individual cannot afford coverage that he or she would need after the settlement, then they are probably wise to retain their existing policy.
   There are often cases where premium financing is available that will keep the policy in force and with the original owners. There are many ways a senior can borrow money or get help to cover premium expense. A good life settlement broker will work with the senior to explain all the options and then help them determine the best course of action.
  
When a life settlement is considered for the purpose of buying a new policy with better terms, if possible it may be wiser to utilize a tax-free 1035 exchange. This allows the senior to roll the full cash value from the existing policy to buy a new policy.  It boils down to comparing the numbers of the exchange against the tax due on a settlement.
 
Life settlement profits––the settlement paid minus the premiums paid––are taxable.  If the profits of a life settlement aren’t significant, it may not make good sense to proceed with the sale. However, if the policy holder simply can’t afford to continue paying the premium, then a life settlement will still be necessary.

 

The Medical Implications of a Life Settlement

If a person cannot qualify to purchase new insurance coverage due to a medical condition or worsening health, then it might not be a smart decision to move forward with the process. If life expectancy is less than 36 months then you are not able to do a life settlement. In this case a very special transaction known as a viatical settlement will need to be entered into.

 

 When in ‘Life Settlement’ Doubt

There are several other situations that may cast doubt on the wisdom of moving forward with a life insurance settlement.

If the life settlement broker is pushing for a quick close, he may be doing so with his best interests in mind, rather than the client’s immediate and long-term goals. An over anxious life settlement broker is a red flag. That said, there are legitimate reasons a broker may  push to close a sale such as a life settlement offer may have an expiration date looming.

The key for the client is transparency and disclosure. The individual involved has a right to know all the determining factors and complete situation before deciding on a senior life settlement.
   
The buyer of a life settlement policy should also be of institutional quality. Ideally, you want to be one of several thousand policies owned by a company that has the highest ethical standards, a company that can well afford the new policy and has a tightly-managed life settlement program.
  
When you are considering a life insurance settlement but are unsure of how your personal situation affects the feasibility of going forward with the process, consult with your life settlement broker. Often a good life settlement company will provide a free evaluation of your insurance policy and be able to explain the options available to you.


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.





When Not To Sell

Life settlements can bring large financial benefits but that does not mean they are always a good choice. A good life settlement broker will help you make the right choices for your unique situation.


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