Life Settlements-The Good,The Bad, And The Ugly

Mention Life Settlements and you’re bound to hear strong opinions, both positive and negative. The life settlement market has grown into a billion dollar industry in the last few years.  If you're over 50 and own a term life insurance policy you no longer need, this could mean money in your pocket.

First, the Ugly
Every market has those who try to “game” the system.  Many seniors have fallen prey to agents tempting them with an offer of free money.  The senior is induced to purchase life insurance without a legitimate need for such coverage.  The insured then waits two years so the policy becomes uncontestable, sells the policy, and shares the proceeds with the other parties to the transaction. This is called “stranger originated life insurance” (STOLI).

There are two major concerns that any individual should be aware of when thinking about such a transaction.  First, there is no insurable interest.  That is, the applicant has no legitimate purpose.  Secondly, many states are considering, or have made this type of transaction illegal. STOLI transactions corrupt the marketplace by changing the basis on which premiums are determined.

The Bad
Many people who have purchased life insurance for legitimate purposes may need money due to a terminal illness.  Individuals who are induced to sell policies in this situation enter into what are known as “viatical settlements”, selling their policy for a percentage of the face amount to obtain money for immediate living expenses.  These transactions became popular at a time when a diagnosis of AIDS meant a short life expectancy. Viatical settlements allowed the terminally ill to receive cash during their last days.

Today, the insurance industry has made such sales unnecessary for policies sold in the last few years.  Most policies include a no-cost rider which allows for a substantial portion of the face amount to be paid to the terminally ill in advance of death with sufficient documentation.  This eliminates the need for a viatical settlement, and gives the insured and beneficiary the full policy value.

The Good

There are many legitimate reasons to consider the sale of a life insurance policy that was purchased in good faith for protection against the insured’s death.  Term policies are purchased for protection for a limited time period.  Generally, these policies are written to protect family members who rely on the insured’s income, or in business situations to protect the company from loss of an owner. Once the original objective no longer exits due to a change in circumstance, a life settlement may be a good option.

Another reason to consider a life settlement would be affordability.  If the premium can no longer be paid due to a negative change in circumstances, the owner may benefit substantially by selling the policy through a life settlement transaction.  Today more the ever, this is unfortunately the situation many seniors find themselves in.

To be considered for a life settlement the term policy must be convertible into a universal life policy.  While some whole life or variable life policies are suitable for purchase, generally this is not the case.  If you own a term policy, simply check the contract to determine when and what your current policy is convertible into. If you are unsure, your agent or the insurance company will be able to help you determine if your policy is convertible.

There are many factors that affect the ability to sell a policy in a life settlement.  Generally, the insured must be over 65 and without a terminal illness.  Remember the insurance company makes a life settlement unnecessary in a terminal illness situation. An agent familiar with life settlements can assist you in determining if this type of transaction is right for you.



Next Steps

If you're considering a life settlement, speak with an agent who is well versed in this area.  They will help you select an experienced broker. There are many life settlement companies that will assist you in selling your policy, but like any transaction “let the buyer beware”.  There are several important considerations when choosing a life settlement broker.  You will want to deal with a company that has been in business for a relatively long time, long enough to generate a reputation.  You will want to see how your transaction is handled in the marketplace.  How many bids are requested?  How transparent is the transaction?  Can you see the various bids for your policy?  How are the funds allocated?

While there are always questions that are specific to your situation, this article should help you to understand the general nature of the life settlement transaction.  A good agent will help you navigate this maze to produce the best outcome for you.

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The Insiders Guide To Buying Term Insurance

Most people consider cost the primary reason for choosing one insurance policy over another. While certainly important, there are additional and by no means less important factors. Among them are some questions to consider.

How strong is the insurance company?

In today's uncertain financial climate the quality of your insurance company takes on new meaning. While no insurance company simply goes out of business due to highly regulated reserve requirements of the various states they operate in, those carriers in danger from poor investment results or real estate loans may well be taken over by stronger carriers. While this generally means the new owner will abide by the guarantees of the original policy the "devil may be in the details." When this happens the new carrier generally considers this a so-called "closed" book of business, a severely restricts your future options.

What options do I have?

Most insurance companies offer both term and permanent life insurance, and most carriers will allow the owner of the policy to convert term coverage into a permanent policy within a specific time period. Although most will allow conversion into many of the competitive products they currently offer, those carriers taken over by others may find they options limited to older cash value policies that may not meet you new objective.

I'm not a smoker, but I enjoy a cigar every once in a while. Should I tell my agent?

The short answer is "yes". While you may feel this is silly, it's not. Why, because the insurance company has the right (and some say obligation) to deny your beneficiary's claim based on fraud, and this is a relatively easy way to show that you, the insured, tried to deceive the company when you applied for coverage. Note that policies have a 2 year period of contestability. This means the company may fail to honor a claim during this period based for fraud or suicide. Subsequent to this time, a claim is paid even if the insured failed to disclose an issue, or died by their own hand.

Why is convertibility so important?

Typically, our health declines with age. We may gain some weight, take a medication or two, or generally not be in the same shape we were at a younger age. However, once you have a term policy in force, you have "locked in" your health category with regard to convertibility. Many people drop their term policies only to find their new options severely restricted.

Why do premiums vary so much?

This usually has more to do with the insurance company than it does with you. Assuming the same health category, you may find premiums differ by 100% or more. While logic may tell you the stronger the carrier, the higher the premium, just the opposite can be true. Today, stronger insurers are using their clout to increase market share. Premiums can also depend on the investment yield the company has experienced, their average bond maturity, mortality experience and other factors. All good reasons to shop before you buy.

What is the first step?
Talk to an experienced independent agent who deals with many carriers. Ask for references, and check the agent's disciplinary record. All states have these records displayed on their insurance department website. Like the purchase of any important asset, let the buyer beware.

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The Ins and Outs of Whole Life Insurance

A breakdown of the pros and cons of whole life insurance

Whole life insurance, otherwise known as permanent life insurance, is designed for people who want coverage their entire life with very few strings attached and zero-risk. Getting whole life insurance quotes is a simple process, but it’s important you understand a little more about how the policy works before shopping around.

Whole life insurance guarantees a payout for the entire term of your life and you pay a monthly or yearly premium for the entire term of your life as well. It’s a very simple policy in its structure since typically the payments do not change (up or down) and the benefit does not change. However, this may not be best suited for everyone, and when you get your whole life insurance quotes you need to make sure you understand exactly what you are buying.

A Quick Breakdown of How Whole Life Insurance Works

Higher Premium – You will notice that whole life insurance quotes tend to be higher than term life insurance and other variable types as well. The reason whole policies tend to be more expensive is that the money you pay into the policy is put into a “savings” program. The longer you pay into the policy, the larger the tax-deferred earnings are that you earn from the money saved up inside the whole life policy. These interest and dividends should be discussed with your insurance agent when you receive you whole life insurance quotes. Also, while you do have the ability to get a loan against your policy, again that is a major financial decision that should be discussed with an agent as well.

Fixed Policy – Whole life insurance policies are fixed in a couple different ways. The first of which is that your payments are fixed at a certain set amount for the entire duration of the policy. Regardless of economic troubles, increases in mortality, etc… your premium always stays exactly the same. So whatever you receive in whole life insurance quotes, that will be the rate you pay forever.

The second aspect of the policy being fixed is that the death benefit always stays exactly the same. The death benefit is agreed upon from day one and even 50 years later it will be the same amount, so plan carefully when you are deciding on how large a death benefit to request in your whole life insurance quotes.

Financial Benefits – Aside from the death benefit, whole life insurance policies allow you to earn tax-deferred earnings from the money you have invested into the policy over the years. However, it takes many years, sometimes decades, to see the full benefit of that, which means whole life insurance policies are a poor vehicle for short term investment.

If you plan to have the policy for decades the benefits of a whole life insurance policy can be quite significant and you stand to earn quite a bit through the “savings” program offered. When you are comparing whole life insurance quotes, ask your agent to show you some calculations of how the tax benefits and earnings potential can offset the cost of the policy over a long enough timeline.

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