Life Insurance – Top Ten Questions – Life Settlements

A life settlement is the sale, assignment, transfer, or bequest of the death benefit or ownership of a life insurance policy by the owner of the policy where the insured does NOT have a catastrophic or life-threatening illness or condition. Typically, the owner of the policy receives cash (generally an amount greater than the cash surrender value in the policy, but less than the full amount of the death benefit); and the life settlement company becomes the new owner and beneficiary of the policy and is responsible for the payment of all future premiums. Upon the death of the insured, the death benefit is paid to the life settlement company. Life settlements usually involve the sale of life insurance policies by owners where the insured is a senior citizen or where the insured may have a medical condition that will likely result in a shortened life expectancy.

The following questions relate to life settlements:

• How does a life settlement differ from a viatical settlement?A viatical settlement is the sale, assignment, transfer, or bequest of the death benefit or the ownership of a life insurance policy by the owner of the policy to a viatical settlement company where the insured has a catastrophic or life-threatening illness or condition. Typically, the owner of the policy receives cash from the viatical settlement company; and the viatical settlement company becomes the new owner and beneficiary of the policy and is responsible for payment of future premiums. Upon the death of the insured, the death benefit is paid to the viatical settlement company. In order to enter into a viatical settlement transaction the insured must have a catastrophic or life-threatening illness or condition. Such illness or condition is not required for entering into a life settlement.

• Does New York regulate life settlements or viatical settlements?Currently, life settlement providers and brokers are not required to be licensed and are not regulated by the New York Insurance Department. However, viatical settlement providers and brokers are required to be licensed and are regulated by the New York Insurance Department pursuant to Article 78 of the Insurance Law and Regulation 148 (11 NYCRR 380).

• What are some of the reasons why I might consider the sale of my life insurance policy to a life settlement company?Some of the reasons why you might consider selling your life insurance policy are as follows:
  • The life insurance policy is no longer needed or wanted
  • Premium payments have become unaffordable
  • Considering surrender of the policy
  • Policy is about to lapse
  • Change in estate planning needs
  • Change in financial circumstances
  • Change in life circumstances (such as divorce or death)

• Are there any fees involved in a life settlement?Yes. A fee, commission, or other form of compensation is usually paid to the life settlement broker who negotiates a life settlement contract between the owner of the life insurance policy and the life settlement company.

• How much money will I get if I enter into a life settlement contract?The amount of money you receive will depend upon a number of factors, including, but not limited to, the age and medical condition of the insured, type of life insurance policy (e.g., universal life, whole life, term), amount of the death benefit, rating of the issuing insurance company, amount of premiums necessary to keep the policy in force, and amount of compensation the life settlement broker receives. You should contact several life settlement companies before selling your policy in order to obtain the best offer. Since you will be providing personal information to these unregulated companies, you should make sure that the companies you deal with have procedures in place to protect the confidentiality of your information. If you have a life insurance policy with a cash value, the amount you receive should be at least greater than the cash surrender value of your policy. (See question on alternatives below.) You should contact your insurance company if you do not know the cash surrender value of your policy.

• What happens to my life insurance policy after I enter into a life settlement contract?The ownership rights and obligations under the policy are transferred to the new owner and a new beneficiary will receive the proceeds upon the death of the insured. This is an important decision that may have significant financial consequences for you and your family members. As such, you may want to include your family as part of your decision-making process before making any major changes to your life insurance policy.

• Will my privacy be maintained? During the application process, you will be required to sign an authorization releasing your medical and other personal information to the life settlement company. Once they obtain that information, it may be shared with other parties, including lenders or third party investors. Be sure to carefully read your application, contract and all other material you receive to determine what procedures the life settlement company uses to maintain and protect the confidentiality of your personal information. Know who is involved in the transaction and check them out thoroughly. If you negotiate through a life settlement broker, find out the name of the life settlement company involved in the transaction. Inquire about the privacy policy of all parties involved in the transaction. Although not regulated by the New York Insurance Department, life settlement companies may be subject to federal and/or state laws with respect to privacy.

• What are the alternatives to entering into a life settlement?There are several options to explore:
  • Borrow against the cash value of your life insurance policy
  • Cash out the policy based on the available cash surrender value
  • Check with the life insurance company to find out if the policy can be converted to a paid-up policy or if the death benefit can be reduced in order to lower the amount of your premium payments
  • Use the life insurance policy as collateral to secure a loan

• Are the proceeds of life settlements taxable?Life settlement proceeds may be taxable. You should consult your tax adviser for additional information.

• What else should I know when considering a life settlement?It is recommended that you consult your legal advisor before entering into a life settlement contract. Since the life settlement industry in New York is not regulated:
  • There are no requirements for disclosure, including:
    • Potential tax implications
    • Benefits of keeping the original policy
    • Any affiliation between the life settlement broker and the life settlement company
    • Receipt of life settlement proceeds may affect eligibility for public assistance programs
    • The insured will be contacted by the life settlement company at certain intervals to determine the insured’s health status.
  • There are no advertising guidelines for life settlements
  • The “agents” involved in these transactions are not required to be licensed or trained
  • The Insurance Department can only provide limited assistance when an insured has a complaint or problem with a life settlement company
  • Life settlement companies may encourage people to purchase new insurance for the sole purpose of entering into a life settlement

Source: http://www.ins.state.ny.us/que_top10/que_life_set.htm