A life insurance settlement is the sale of a life insurance policy to another person or a 3rd party. Sometimes called a “life settlement”, a “senior settlement” or a “lifetime settlement”, the life insurance settlement typically offers the original policyholder more money than the cash surrender value of the policy and offers the life insurance settlement company an opportunity for substantial profits. The purchaser of the life insurance policy will be responsible for any ongoing premiums and expenses. In return for “taking over the policy”, the buyer will also receive the death benefit.
Unlike a viatical settlement (which will be discussed in further detail below), the insured does not need to be terminally ill. Life insurance settlements are typically offered to older policyholders, although high-value, long-term life insurance policies may be purchased from younger policyholders as well.
Why Sell Your Life Insurance Policy To Someone Else?
Life insurance settlements can offer an insured person who no longer wanted, needed or could afford the opportunity to liquidate the policy a value well-above the cash surrender value (which is the value of the policy if the insured stopped paying premiums, or canceled the policy).
Although the viatical industry is becoming increasingly regulated, the life insurance settlement industry remains unregulated in nearly all states. Scams and frauds are not uncommon and anyone considering a life insurance settlement should make certain to receive multiple quotes from multiple companies and to carefully investigate the backgrounds of those companies.
Viatical Settlements Explained
A viatical settlement allows you to invest money into another person’s life insurance policy. With a viatical settlement, you purchase the whole policy (or at least part of it) for a price that is less than the death benefit of the policy. When the seller dies, you collect the death benefit. Viaticals can offer investors a high reward investment and therefore are attractive options to many (although some people question the morality of doing so).
Your return on your investment depends upon the seller’s life expectancy and the actual date he/she dies. If the seller dies before the estimated life expectancy, you may receive a higher return. If the seller lives longer than expected, however, your return can be lower. You can even lose out on your principal investment if the person lives long enough so that you have to pay additional premiums to maintain the policy.
For the reasons highlighted above, viatical settlements can be risky investments. For these reasons, you should exercise caution and thoroughly investigate the policy you are thinking about “taking over” before you consider investing in a viatical settlement.
Who Regulates The Sale Of Viatical And Life Insurance Settlements?
The viatical settlement and life insurance settlement industries are still developing, and regulation remains weak or non-existent in many states. No federal legislation exists to regulate these industries, and all regulation is left entirely to the states. Most states have some form of regulation for the viatical industry, but few have any regulation for the life insurance settlement business.
Many state insurance commissioners and government agencies license the companies that buy viatical settlements to sell to investors. They may have information about a specific company or viatical settlements in general. To find out who your state insurance regulator is, please visit the website of the National Association of Insurance Commissioners. The Federal Trade Commission also has information for those who are considering selling their life insurance policies.
There is even a great degree of variation between the regulations enacted in different states. The amount of regulation varies from simple registration with no real background checks all the way through to detailed company investigations, law compliance, mandatory disclosures, and common forms.
If you are considering a viatical or life insurance settlement, the best way to protect yourself is to do your research and exercise common sense. Speak with multiple companies, call your state regulator, speak with your state’s Better Business Bureau, etc. It might also be a good idea to read reviews of said company on sites such as Yelp, Facebook, Consumer Reports, etc.
What Are The Tax Implications Of A Viatical Or Life Insurance Settlement?
A portion of the money that an insured person (policyholder) may receive from their viatical or life insurance settlement may be tax-free.
Specifically, all premium payments that have been made to the policy over time would be tax-deductible. Any amounts received greater than the cumulative premiums paid, however, would be taxed. Life insurance settlements may be entirely tax-deductible, while viatical settlements are much more likely to be closer to the death benefit and therefore much greater value than the premiums paid.
As always, do not simply “take our word for it”. Tax laws are always changing, so there is a good chance that rules valid in previous years are no longer valid. Please make sure to consult with a qualified tax professional to evaluate your situation individually.
I am 68 and confined to a motorized wheelchair as I have MD. If I sell my $5,000,000 term policy for $500,000 and I paid $320,000 in premiums, what would be my tax liability? I have been in wheelchair for the past 7 years and cannot work any longer
You need to consult a CPA. We can not give tax advice.