A life settlement is the sale of a life insurance policy by a policy owner who no longer wants or needs his or her policy. If you or someone you know is considering a life settlement, here are a few points to consider before selling.
1. Fraud – If you bought your insurance policy during the last couple years with the intention of selling the policy after the two year contestability period, you may not be able to do so without committing fraud. Most insurance carriers added questions to their applications in 2005-2007 specifically asking if the owner had any intent to sell or transfer the policy at a later date. If you answered “yes”, they would have most likely declined you for insurance. So some unscrupulous insurance agents, overcome by the lure of enormous commissions, may have answered “no” for you to this question. If you knew you might sell the policy down the line, check the back of your policy where the original application is attached, and read through it carefully, assuring you are not committing insurance fraud if you enter into a life settlement.
2. Commissions – Many life settlement brokers do not disclose the commission they will make by helping you sell your policy. Some will make up to 5% of the face value! For example, they may get paid $50,000 for a policy with a $1,000,000 face value. You might try asking your broker up front what percentage he or she earns, and just like with a real estate agent, you could try to negotiate their commission.
3. Consider your Options – A life settlement may not be right for you. If you can no longer afford your premiums, you may be able to stop paying your premiums for months or even years without your policy lapsing, if your policy has sufficient cash value in it. Some insurance carriers will allow you to reduce your face value, thus lowering your premium. You might ask your children or grandchildren to help you pay the premiums. When they see the future benefit for themselves, they might be eager to help. There are many other options you have as well, so do your research before selling.
One last note is you should really consider using a broker. Imagine you’re selling a house in the country without a real estate agent, and you only ever get two people to come look at the house. What are the odds you’ll get an attractive offer, or even get an offer at all? Not very good. A good life settlement broker will put your policy out to bid to more than 20 bidders, which increases your chances for a larger settlement.
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