Coverage You Didn’t Know You Had

One interesting twist on life settlement transactions applies to people who retire or leave a company where they have a group term life policy, and have the option of converting that policy to an individual policy when they leave.

Many states have adopted a law that gives employees about 30 days after leaving a company in which to convert that group policy to an individual policy and take over the premiums for the policy to keep
the coverage. Ask your company’s human resources department to see if this would apply to you.

Freeman said he had a client who was a lawyer who had $367,000 in coverage under a term policy while he was working. After retiring, the face value would drop over time to just $78,000 in five years.

The lawyer retired at 67, and converted the policy to a whole life policy with $367,000 in coverage. He paid premiums on it for two months before selling it to a life settlement policy to receive $215,000 in cash.

“We’re seeing life settlements move to the middle market, it’s not necessarily just for wealthy people anymore,” Freeman said.

Taxes

An important consideration is how much you’ll have to pay in taxes if you do a life settlement transaction. Selling a life insurance policy means selling an asset, which triggers taxes. It would be worthwhile to speak to your tax professional about how this could impact you.

Generally, you don’t owe taxes on the premiums you’ve paid and would owe ordinary income tax on the difference between the premiums you paid and the cash surrender value of the policy. But you would pay capital gains on the difference between the cash surrender value and the final settlement amount.

Where to Go

Most people who are considering a life settlement need the help of a financial adviser. Advisers have a duty to represent your best interests, and can be paid by a fee or commission. Rule and regulations vary by state. About 29 states regulate life settlements in some form. Another 12 have regulations for just viatical settlements. Check with your state insurance department to see if there’s a list
of licensed brokers.


Terms to Know

Life Settlement: a transaction in which a third party takes over your life insurance premiums and becomes the beneficiary of the policy. In return, you receive a payment that is higher than the surrender value of the policy, but less than the death benefit. Life settlements are generally for
seniors who aren’t terminally or chronically ill.

Viatical Settlement: similar to a life settlement, but for people who are terminally ill.

Accelerated Death Benefit: a payout that some insurance policies offer that would allow terminally ill patients to tap into their life insurance policies while they are still living. Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6