Life Settlement and Viatical Settlement Plans
Q: I am 71 and own a life insurance policy that I don’t really need. I’ve been approached to consider something called a life settlement. How does that work? —- Beth, Oceanside
A: Life insurance can be a very important part of a financial plan. But many people find that later in their lives, they are saddled with a policy that no longer is necessary or serves any purpose.
Remember, life insurance is income replacement. A wage earner with a mortgage, young family and other obligations should carry enough life insurance to cover these costs if they die.
But later in life, after the mortgage is paid, the children are gone and financially independent, the need for life insurance diminishes.
Life settlements offer the opportunity to sell an insurance policy and have access to the money that was considered to be locked up.
The process is simple: A policy owner —- in most cases, older than 70 —- agrees to sell the insurance contract to an independent investor for an amount that is usually more than the cash-out value, but less than the death benefit. The new owner continues to pay the premiums on the contract, and then receives the full benefit when the insured party dies.
The marketplace for these settlements is enormous. In 2002, life settlements totaled $1.4 billion and rose to $5 billion in 2004.
Don’t expect a life settlement to be a bonanza. A recent study suggested that the average price paid for a life policy is equivalent to 20 percent of the policy’s face value. For instance, an eligible policyholder with a $1 million policy might get about $200,000.
While the life settlement industry seems to be reputable, it is still necessary to be a savvy consumer when contemplating such a transaction.
Check out the credentials of the person and company that are suggesting the settlement. And it always pays to compare. There are several companies actively involved with life settlements, and the fees they charge can vary.
One other point: Do not confuse a life settlement with a viatical settlement. Life settlements are simply an option to access cash from an unnecessary policy. Most people who use these products have a life expectancy of as much as 15 years or more.
Viatical settlements are designed to assist people who are suffering from a terminal illness and need the money to enhance the quality of life in their remaining months or years. But be careful. Year after year, viaticals are on the list of the top investment scams.
Source: NC Times
