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Thinking about a life settlement? Pay attention to the details

Mon Nov 23rd, 2015 on     Insurance Law,    

We are continuing our discussion of life insurance policies and different ways the policy owner can take advantage of a policy’s value. Our focus here is on one particular option: the life settlement.

Of all of the options available to a life insurance policyholder, the life settlement will likely be the most profitable. Cashing in the policy, selling it back to the insurance company, will net the cash value of the policy (see our Nov. 16 post for more information). In contrast, a life settlement should net the cash value plus a certain percentage of the benefit amount.

The first thing you need is a permanent life insurance policy, a policy that you own — that is, yours is the insured life and you pay the premiums. Industry experts suggest life settlements work best with policies with a death benefit of $100,000 or more.

Work with a licensed life settlement broker or provider. Florida and other states have spent a good deal of time (though some would say not enough) writing regulations for life settlement practices. The license is evidence that your broker understands the rules and is in good standing with the state. Consumer advocates warn policyholders to be wary of “deals” and “special offers” featured in Internet advertisements and television commercials.

You and your broker will negotiate the sale of your policy to a third party. Once the sale is complete, you receive the cash settlement.  Researchers say the settlement can be as much as four times greater than the cash value, a distinct advantage over selling the policy back to the insurer.

You will no longer pay the policy premiums; they are taken care of by the third party purchaser. When you die, the purchaser will receive either all or a portion of the benefit, depending on the terms you and your broker were able to negotiate.

As with all insurance products, there are risks. First, you will likely pay fees to the professionals involved. The settlement may be taxable or could interfere with Medicaid coverage. (Or, Medicaid could require you to include the policy in your spend-down, like any other liquid asset; you would have to sell your policy before you can qualify for benefits.)

If you have questions about your own experience or have had a problem with a life settlement, you may want to consult an insurance attorney.

Source: NerdWallet.com, “Before Death Do Us Part: Selling Your Life Insurance Policy,” Alice Holbrook, May 5, 2015

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