Viatical settlements involve the sale of a life insurance policy held by a terminally ill policyholder to another party. The life expectancy of such individuals is generally less than two years at the time of sale. The owner of the life insurance policy receives a cash settlement for less than the face value of the policy. The policy is then transferred to the policy buyer, who pays the premiums on the policy and receives the death benefit amount of the policy when the insured dies.
Similar to a viatical settlement, a life settlement involves the sale of one’s life insurance policy to a third party in exchange for cash. In a viatical settlement, the insured party is terminally ill, and generally must have less than two years to live. Alternatively, a life settlement does not involve any terminally ill people. It simply involves selling off the life insurance policy, generally belonging to a senior citizen, to a third-party.
Life settlement firms, or life settlement companies, are institutions existing to facilitate the purchase of life insurance policies from policyholders. Such companies may purchase the life insurance policies directly, while others simply connect buyers and sellers to each other. When directly purchasing the policy, life settlement firms will pay the original policy owner a lump sum. Additionally, the company will take over the premium payments. In return, the person purchasing the policy will receive the death benefits when the policyholder dies.
A life settlement contract is what allows an insured person to sell another insured’s life policy to a third party. This is done in exchange for cash, a loan, or some other form of consideration. Once a life settlement contract has been created, either the contract or an interest in the contract may be sold as an investment.
How Do Life Insurance Settlements Work?
When a person is insured through life insurance, and can no longer afford their policy, they may choose to sell it for a specific amount of cash to an investor. Generally speaking, such cash payments are tax free and equals more than the surrender value, but less than the policy’s death payout.
By selling the life insurance policy, the insured person is transferring every aspect of the policy to the new owner. What this means is that the investor who has taken over the policy will inherit everything related to the policy. This also means that the policy buyer is responsible for everything related to the policy, including premium payments.
Although there are many reasons why a person may sell their life insurance policy, finances are the most common reason. Many older policy holders need money for retirement, but have not been able to save up enough money to do so. For this reason, life insurance settlements may also be referred to as senior settlements. Because the insured party will receive a cash payout, the insured person is able to supplement their retirement funds with the largely tax free payout.
Some other common reasons for choosing a life insurance settlement may include, but not be limited to:
- Being unable to make insurance premiums;
- There is no longer any need for the life insurance policy;
- Emergency situations in which the policy holder would need the funds to cover expenses; and/or
- Cases that involve key individual insurance policies that are held by companies or executives.
Viaticals and life settlements are of questionable legality. This is due to the fact that they seem to blatantly go against insurable interest laws. These laws are intended to prevent people from taking out insurance policies on strangers as a form of investing or gambling. However, although many states are enacting legislation to regulate the sale of life insurance policies, it is currently legal to do so in most states.
Who Would Want to Buy My Life Insurance? Why Should I Sell My Life Insurance?
Life settlements can be purchased by anyone. However, as previously mentioned, seniors generally sell them to large firms that specialize in viaticals and life settlements. Due to the fact that there is currently a large amount of legislation regarding viaticals, there has been a growing market trend for the sales of policies that do not meet the technical definition of a viatical settlement. Thus, such circumstances escape regulations.
Unlike a viatical, there is no likelihood of death in the near future. Therefore, there is less chance of an immediate return. As such, life settlements typically involve much larger life insurance policies. Here, larger would be considered in excess of $300,000. Additionally, such sales pay out the insured person less for the policy than they would pay out for a viatical.
As previously mentioned, many older people may have sudden financial difficulties. They may then have the need for a quick infusion of income. Because trading your life insurance policy into the company will generally pay out only 5 – 25% of the actual cash value, selling a life settlement can be a good way to quickly stabilize finances without having to worry about premiums. A life settlement lawyer can provide sound information regarding whether it is in your best interests to sell your policy.
Do I Have to Pay Taxes if I Sell My Life Insurance Policy?
It is important to note that life insurance proceeds received as a beneficiary, i.e. the death of the insured person, are not included in your income, and do not have to be reported. However, any interest received is taxable and does have to be reported to the IRS.
The treatment of the sale of a life insurance policy is different. Similar to other assets, any gain you receive from the sale of your life insurance policy will be subject to income tax. The amount subject to income taxes is generally the amount received from the sale minus the amount of premiums paid into the plans. It is important to consult the tax code for the exact calculation of how much of the sale should be reported as income, and how much should be reported as capital gain.
What Are the Alternatives?
There are a few alternatives to selling a life insurance policy. If you are within one or two years of your projected life span, which is determined by your insurance company, there is a good chance that you may receive accelerated benefits. What this means is that your company will pay, in advance of your death, a significant portion of the death benefit that otherwise would be paid after death to the beneficiaries.
These specific amounts will vary, but can be as high as 80%, if the policy holder has kept up with their payments. Additionally, the policy holder must be in good standing. However, even if you do not meet the requirements for an advance benefit and you find yourself in need of the funds that an advance benefit would provide, a life settlement may be something you should consider.
Do I Need an Attorney for Help with a Settlement?
Because of the lax regulation of the life insurance investment world, there are various kinds of fraud frequently committed by the insurance companies as well as the “viator,” or, person selling the insurance. Selling your life insurance policy for cash value involves a large amount of important consumer issues, such as a fair valuation of the policy, proper income tax treatment, and the impact of the life settlement on eligibility for government assistance.
If you are considering making any kind of viatical or life settlement, it is imperative that you consult with a life settlement attorney, or a local business attorney. An experienced and local attorney will be skilled and knowledgeable regarding the laws of your state, and can guide you through the process. Additionally, they will also be able to represent you in court as needed, to ensure that you are getting a fair deal.
