In the wide world of capitalism, there's almost nothing you can't sell for the right price. A relatively new niche in insurance makes it possible for some older people to sell their life insurance policies to an investor.
The idea may appeal to anyone in a financial crunch, or others whose life insurance needs or wants have changed. Take a look back at the previous article to find out more about these life settlements (also called senior settlements) and some of their pitfalls.
If you're interested in pursuing the idea, you'll need to do lots of homework. As is the case with many financial products, you'll probably be on better ground if you pursue the investor instead of responding to solicitation from investors trying to entice you. Here are some questions that NASD, the private-sector securities industry regulator, encourages any potential seller to ask, along with a few of our own.
Why sell? If you're in serious financial peril, facing medical bills or other steep costs, you may want to investigate all of your options before jumping into a life settlement. Your payout will certainly be less than your beneficiaries would receive upon your death. If you have other motives, investigating them may help you evaluate whether a life settlement is a good route to your goals.
Who's licensed? An increasing number of states license life settlement companies and brokers. They may also have specific regulations for the industry. Check with your state insurance commissioner for more information.
What's the best price? Get multiple offers and as much information about each offer as possible, including the fee structure for the advisors offering to broker your transaction. Shopping around will help you make sure you get the best price possible.
What are the transaction costs? These can be high. NASD says life settlement companies may pay life settlement brokers and other advisors commissions as high as 30%. Know your advisor's role in the transaction.
What will I have to disclose? When you sell your policy, you will have to release medical and other personal information, which will be factored into any offers made by potential buyers. You may have to provide occasional health updates. Find out whether the buyer will share this information or whether it will be protected.
Will my privacy be protected? Find out what happens to your personal and health information if the institution buying your policy resells it.
What will the tax consequences be? You'll get your life settlement payment as a lump sum, so you stand to lose a chunk of it to taxes. Make sure you know the tax and other secondary consequences before you agree to the transaction.
Can I change my mind? Some states have laws that allow you to reconsider your decision within a certain period of time.
As with other financial decisions and products, stick to your Foolish principles. The life settlement industry would not be growing so quickly if it didn't offer impressive gains to its investors.
If you shun full-service brokers and their high commissions and fees, don't fall for a life settlement that's more in your advisor's interest than your own. Be especially wary if you're encouraged to purchase a new policy from the advisor who arranged your life settlement, because that advisor may stand to gain twice.
- Should You Take a Viatical Settlement?
- Your Life Insurance Number
- Foolish Advice on Life Insurance
- Whole Life vs. Term Life