selling your life insurance

A number of years ago, I began working with a couple who lived in Manhattan. At the time, Gregory was 55 and a highly compensated executive at a mid-sized corporation. Janice was 13 years younger and worked as an illustrator for a children’s magazine. There was a sizable difference in their incomes as well as their ages.

Gregory purchased life insurance to ensure that, when he passed on, Janice would be able to continue the lifestyle they enjoyed. Two years later, Janice was diagnosed with multiple sclerosis. Over a period of time, she became increasingly debilitated and needed more and more care. Care costs significantly impacted their investment portfolio as paid caregiving was the only option available to them.

After Janice passed away, Gregory contacted me about surrendering his life insurance policy. He was then in his late 70s and had developed his own health issues. There seemed to be no reason to continue paying his life insurance premiums.

I contacted the insurance company and learned that if Gregory surrendered his $750,000 universal life policy, the insurance company would issue him a check for $38,000 – the cash surrender value (CSV).

I also contacted a life settlement brokerage company to see what his policy would fetch on the secondary market. After providing the broker with some health information and details on the policy, I presented Gregory with several offers, the best of which was $175,000. He accepted immediately and had a check within a few weeks.

Most people are unaware that their life insurance is an asset and can be converted to cash just like any other asset. The sale of life insurance is called a Life Settlement. Usually, the purchaser is a large company or an institutional buyer that pays the policy owner, on average, three to eight times the cash surrender value of the policy. (Term policies with no cash value and group insurance may also be sold.) In return, the buyer takes on the premium payments and, ultimately, will be paid the death benefit.

The proceeds from the sale of life insurance are subject to capital gains taxation. The capital gain equals the proceeds of the life settlement less the cost basis. The cost basis is equal to the total of premiums paid minus the cost of insurance. These numbers can be gotten by requesting a tax quote from the insurance company.

If the purpose of the life settlement is to pay for long term care, a trusts and estates attorney may be able to create a plan by which the capital gains tax would not be triggered.

For many people, life settlements have become an unexpected source of cash they can use for any purpose: additional retirement income; the joy of gifting to grandchildren now rather than later; ability to age in place or choose an upscale retirement home; or pay uncovered medical costs.

Life settlements are most appropriate for people over the age of 75 who have policies in excess of $100,000. Selling one’s policy instead of letting it lapse can be a welcome source of funds. Seek a life settlement quote if you cannot afford the premiums, no longer have need for the insurance, or just want the cash.

TIP: Make sure your agent has a life settlement license (a requirement in New York State), is working with reputable companies, and provides you with more than one offer.

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