People are often savvy with their financial investments, including purchasing a life insurance policy. So, they would use their best judgment and seek wise advice when selling them. But, unfortunately, too often, that does not happen. Sometimes, in haste and needing more information, individuals cash out their life insurance policies for thousands, if not tens of thousands, less than they could have received – without fully knowing the negative consequences.
The Financial Investments Regulatory Authority (FINRA) issued a cautionary advisory in 2007 warning seniors about potential high cost, pricing, impact on finances, and privacy pitfalls when selling a life insurance policy. “Life settlements are not for everyone,” former FINRA Chairman and CEO Mary Schapiro said. “While they can be a valuable source of liquidity for people who no longer want or need their current policies, life settlements can have high transaction costs and negative consequences for your financial situation. And it is complicated to determine whether you’re getting a fair price for your policy.”
Finding the right Broker is essential in selling a policy. You want a broker who can seek bids from many “funders” and create an auction for the policy, to be sure you are getting a top-dollar offer. Then, if you agree to the bid, the sale is expedited, the policy owner is changed, and you are paid.
The percentage of the face value of the policy you will receive depends mainly on your age, health, life expectancy, and any other special terms written into the policy. How much more you receive depends on the network of contacts your Broker may have and what commission percentage the Broker is willing to accept to continue a good working relationship vs. trying to make a one-time commission.
Individuals seeking to sell their policies should ask brokers how many years they have been in the business, how many settlements they have brokered and how many contacts or institutional buyers they contact. In short, shop around and seek out licensed brokers. And while you are at it, here are some other factors to consider:
- If you are cashing out your old policy, ask what it will cost you to get a new one. You may get cash for the old policy, but it may affect your ability to get future coverage if desired.
- Commissions paid by the buyer to life settlement brokers or others could reach as high as 30 percent. Don’t be afraid to ask if your Broker’s commission is negotiable.
- Certain state and federal programs have income limitations. Cashing out a policy may eliminate your participation.
Before selling your policy, you must release medical and other personal information so the buyer can determine how much to offer for your policy. That information, in turn, may be shared with other parties, lenders, third-party investors, etc. You may also have to agree to provide periodic updates about your health. Demand to know what confidentiality safeguards are in place to protect your privacy.
Purchasers want to know as many details about the policyholder as possible. Bluntly speaking, they are acquiring a financial interest in your death. By buying your policy in a lump sum, they agree to pay any additional premiums to keep the policy in effect. They receive the death benefit when the original policyholder dies – unless they have re-sold your policy to someone else or another institutional investor. Investors in life settlement policies generally look for individuals with two to 17 years of life expectancy. Life settlements have proven to be a financial opportunity for senior clients who don’t have chronic or catastrophic illnesses. They are popular because, depending on your age and life expectancy, your life insurance policy assignment can generate two to four times the cash you might otherwise receive from your life insurance carrier.
Sometimes you may be pleased to have a life insurance policy settled. For example, say that a life policy taken out in your name and owned by your children is no longer needed. The sale of the policy may give your children maximum benefits now. In addition, you may take great delight that the children can enjoy the sale proceeds during your lifetime.
Your circumstances may be different. For example, you may need money from your policy but still want coverage. In those instances, you can borrow against your policy. You might also be eligible for “accelerated death benefits”. Whatever decision you make, do so only after consulting with a trusted professional in the life insurance field.
