Questions and Answers about Life Settlements
1. What is a Life Settlement? A life settlement is the sale of an in-force life insurance policy for an amount great than the cash surrender value of the policy and less than the face value of the policy.
2. Who is eligible for a life settlement? Persons 55 years of age or older who have experienced a major health condition change and have a life expectancy between two and twelve years. The face value of the policy must be at least $100,000.
3. Why sell a life insurance policy? An owner of a life insurance policy may sell the policy if he or she decides she no longer needs it. Examples of such situations are business-owned policies where the insured is no longer involved in the business, or where the insurance proceeds are no longer needs to pay estate taxes. It also simply may be that the owner can no longer afford the premiums.
4. What kinds of policies are eligible for purchase? Life settlement companies will purchase whole life, universal life, and term life policies, including second-to-die policies.
5. Who is responsible for premium payments after the policy’s sale? The life settlement company pays the premiums after it purchases the policy.
6. Is a life settlement confidential? Yes. No personal information, medical, financial or otherwise, received by the life settlement company will be disclosed to any other person without specific written consent.
7. What can the sales proceeds be used for? Anything at all. There are no limitations on how the funds can be used.
8. How does the transaction work? The owner of the policy (and the insured, if he or she is not the owner) submits an application to the life settlement company, with a copy of the policy. The life settlement company then requests an in-force illustration of the policy showing the face amount, any outstanding loans, and the premiums due. In addition, the life settlement company obtains copies of the insured’s medical records directly from his or her physicians. From these records, the life settlement company determines if its guidelines for making an offer to purchase have been met. When the offer is made and accepted, a closing for the transaction is arranged. The purchase price is generally placed in an escrow account, and generally the policy owner has 15 days to rescind.
9. How long is the entire process? In many cases, the transaction can be completed within 30 days.
10. Must an owner sell all of his or her insurance? No.
11. Are the proceeds from a life settlement subject to income tax? The amount invested in the policy (premiums paid) are generally income-tax free. The difference between the amount invested and the cash surrender value is taxed as ordinary income. The amount received in excess of the cash surrender value is normally taxable as capital gain.
12. Whom should I talk to about a life settlement? Because of the many tax, legal and other issues involved in a life settlement, it is important to speak to a qualified tax attorney before selling a life insurance policy.