December 22, 2018
In recent years, the possibility of selling a life insurance policy as a means of raising funds has become increasingly popular with policyholders. In fact, an entire industry called ‘Life Settlements’ has sprung up around this practice, with some companies eager to purchase prime life insurance policies, in expectation of cashing in the death benefit when an individual passes on. There are undoubtedly a good number of reasons to sell a life insurance policy, most of which have to do with changing life circumstances for the policyholder, but before plunging into what may seem like an attractive idea, there are some things you should consider.
Until a policy actually changes hands, you should not allow the policy to lapse by missing the payment of any premiums which are due. Regardless of what stage your negotiations are in with a buyer, all premiums must be paid and kept current. If not, your policy sale will more than likely fall apart, or, in the best case, delay it. Failure to keep premiums paid on time can either reduce the value of a policy, or completely eliminate any dollar value which existed in the policy.
Timing Of A Life Settlement Transaction
It’s important to consider the timing of a life settlement transaction for a couple of reasons. First of all, you’re probably considering the transaction in the first place because of a life change you have undergone, or are about to undergo. Be aware that a life settlement transaction can take weeks if not months to arrange, and in order to help manage the life change you’re involved with, the timing of your policy sale will have to be coordinated pretty closely. Buyers of policies will also be interested in timing, from the standpoint of having greater interest in ‘clean’ policies with no attachments or provisos, which can be moved forward quickly, so their money isn’t tied up for long periods.
Set Realistic Expectations
By setting realistic expectations, you can remove much of the emotion which might otherwise accompany a life settlement transaction, and that will be very much to your advantage. Take your time, and give some thought to opportunity costs, sunk costs, replacement products, and the tax implications that will result from the sale of your life insurance policy. There is no guarantee that the value of your life insurance policy today will be the same in two years or five years, so you should expect a ‘diminishing returns’ scenario as time goes by.
When going through the underwriting process for a life settlement transaction, the life settlement provider will probably pose a number of questions to the policy owner, and these all need to be truthfully answered, or the buyer will probably abandon the deal. The life settlement company endeavors to learn important information about the policy during this process to determine its suitability for purchase. Any buyer of a policy would want to know whether there has ever been a policy loan against it, or whether the policy has ever changed hands. If you don’t fully disclose all information requested of you on an application form, any offer you get will likely be drastically under-valued, or you may get no offers at all. The other risk is that during the sale process, these facts come to light and your offer is cancelled or the price is changed.
Make Sure To Engage The Services Of A Licensed Broker Or Provider
If you are seriously thinking of selling your life insurance policy, be sure to retain a licensed life settlement broker or provider. State licensing requirements ensure that you are protected as a policy seller. A licensed life settlement company is regulated by the state which issued the license and assures the seller that the company’s principals, policies, and procedures have all been vetted. And in the case of licensed life settlement providers, regulators have reviewed and approved all closing documents to transact the sale of your policy. Some states have more stringent regulations than others, Florida for example has the most thorough licensing process. There are fewer licensed life settlement providers in Florida as a result, and those providers can be viewed to have completed a more thorough licensing review, and thus be a more credible company to work with. A great resource in addition to our site is the Life Insurance Settlement Association website (www.LISA.org) and you can even find a list of brokers and providers on their site.