Life insurance is an indispensable tool, especially in your old age. There is a marketplace for everything nowadays including life insurance policies.
The transaction whereby someone, often senior citizens, sells their life insurance policies to a third party in exchange for cash is called a life settlement. The insurance is usually sold to an individual or entity that did not issue the policy.
Life settlements can have unintended consequences, so you should know as much as you can about them. It is especially difficult to evaluate if you are getting a fair price for your policy.
The following are some things you should know about life settlements:
How Life Settlements Work
Life insurance policies are meant to pay out the stipulated funds to the beneficiaries once the policyholder is dead. However, their needs may change and may require the funds before the policy expires.
In a life settlement, the party that is holding the policy at the time of its maturity gains the payout. Many investors and institutions discovered their value and they either resell the policy or collect the payout depending on which is profitable.
You should know that by engaging in a lifetime settlement transaction, you are giving someone a financial interest in your death. It may be very risky especially when dealing with malevolent parties.
The price you will get for your life insurance policy in the secondary market will be influenced by a wide variety of factors. It will make it very difficult to know if you are getting a good price on the deal.
Your Fiduciary Responsibility
A life insurance policy is often viewed as an asset like stocks or bonds. However, they are not quite the same as the benefits of the latter usually accrue to the holder of the assets.
Before engaging in a lifetime settlement, you should understand your options as far as maximizing the value of the asset is concerned. That is your fiduciary responsibility.
You should get the help of a professional to understand the full ramifications of engaging in a lifetime settlement. However, there is no substitute for doing your own research.
Lifetime Settlement Regulation
Since there is a marketplace for lifetime settlements, there are also regulatory authorities. In the United States, lifetime settlements are regulated in 42 states plus Puerto Rico.
It is crucial that you understand the regulations governing lifetime settlements in your particular state. Learning the different States eligibility requirements will help you understand your options. Otherwise, you might be getting a raw deal for your policy.
The party that purchases your life insurance policy should have a license to do so. Failure to adhere to the state regulations will result in fines, penalties, and in some cases, incarceration.
Lifetime Settlement Evaluation Process
Like any other asset or investment, there is an evaluation process regarding lifetime settlements. You should strive to understand every element of this process if you are to engage in a lifetime settlement or risk harsh consequences.
The first step is submitting all the relevant information regarding the lifetime policy. The next step is to allow the buyer enough time to analyze the policy. The economic validity of the policy will be the most crucial point.
The last step involves coming up with a valuation for the policy. You can then either refuse or accept the price offered. It will usually take sixty to ninety days to conclude the lifetime settlement transaction.
You Can Buy a New Policy
One of the reasons why you may decide to engage in a lifetime settlement is because you found a better policy. It may also be the case that you cannot afford to pay the premiums on your current policy. You can then use the proceeds from the lifetime settlement to buy another policy.
When getting a new policy, certain factors may lead to you getting a harsh deal such as age and medical problems. What you should know is that you can use a 1035 Exchange to switch from one policy to another.
A 1035 Exchange would be a better deal if you want to change policies than a lifetime settlement. It is less costly and has far fewer and less potent financial ramifications than a lifetime settlement.
It will help you protect yourself, and it will also be advantageous for your beneficiaries. You should consult an insurance professional about the best way for you to use a 1035 exchange for you to switch policies.
As you can see, there is a fair bit that you should know about lifetime settlements. The above points are only the tip of the iceberg as there is much more to learn. The crucial point is finding out if a lifetime settlement is the best deal for your individual situation.