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Local Expert: Is it worth it to sell an old life insurance p
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Posted by nwv_admin Sun Oct 24, 2004 21:38:00 PDT
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0 responses 0 comments According to the Wall Street Journal, nearly 90 percent of term life insurance policies lapse without the insurance ever having to payout any claims. Undoubtedly, many people simply decide they don't need it anymore or they're just tired of paying for it.

But selling your old life insurance policies for a fraction of their insurance value (death benefit) can put money back into your pocket.

A process called viatical settlements were designed to put cash in the pockets of the dying. However, viaticals ran into problems when the policy owner lived longer than expected. Good for the original policy owner, but not so good for the investor buying the policy.

This process has started to change over the past few years, and now healthy individuals are selling unwanted life insurance policies for cash.

But before you start digging through your file cabinets looking for your policies, here are a few things you should know:

The selling of a life insurance policy by a healthy person in exchange for a pile of money is called a life settlement. Like a viatical settlement, the buyer of the policy receives a percentage of its face value and continues paying the premiums until the insured dies, then receives the full value of the policy.

While standards vary among companies that buy the policies, typically to be a good candidate you must be about 65 years old. The percentage of the policy's face value that's paid out in cash may be as small as 10 percent to as large as around 40 percent. The percentage depends on the type of policy you own, the details within the policy, your life expectancy, medical and health history and premium costs.

Do you need the insurance? Most investors won't bother with policies under $200,000, and many investors prefer policies of $500,000 or more.

Assuming you have a policy that might qualify for sale as a life settlement, the major question becomes whether it's a good idea to sell the policy or keep it.

Can you afford the premiums? One of the main reasons people dump their insurance policies is that they can no longer afford the premiums. If you can't afford or can't justify continuing paying the premiums, and intend to let the policy lapse, selling the policy could get you a tidy sum of money to use elsewhere.

Many financial advisors say that as you age, your need for life insurance should decline. However, your needs may diminish but not disappear. For example, you may still need the insurance to replace pension income that may be lost upon death. Also, insurance policies held by older Americans, in many cases, are for the purposes of paying estate taxes.

Receiving money for selling your policy may be tempting, but before you make the final decision, speak with your financial advisor.

Do you need the money? Selling a life insurance policy because you need the money to pay for other necessities may make good financial sense. Purchasing health coverage, long-term care insurance or investing in order to supplement your income can all be valid reasons to sell your policy.

Have you considered alternatives? For example, because the discounts for life settlements are often steep, you may do better financially to borrow against the policy and use the money for medical needs or to help fund retirement. You may also risk forfeiting certain rights in the policy, such as disability or conversion benefits, if you sell it (even though you remain the insured). Creditors may have a claim on the proceeds, and receipt of the proceeds could affect your eligibility for Medicaid or other government assistance.

What are the tax consequences? Death benefits from a life insurance policy are tax-free. Many tax advisors believe proceeds from life settlements are taxed as ordinary income.

Selling your life insurance policy could certainly be a financially rewarding alternative compared to letting it lapse. But it is wise to consider the pros and cons prior to making your decision.

Andy Barkate, CSA, is a Northwest resident and president of California Financial Network, a local investment and retirement planning firm. You can e-mail Andy at abarkate@calfinancial.com.

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