Life settlements can be a viable option for seniors willing to exchange their life insurance policy for immediate cash. A life settlement is the sale of an existing life insurance policy for a lump sum of money. It allows policyholders to access the fair market value of their life insurance by selling their policies and receiving payments greater than the cash surrender value.

Technically, a life settlement contract allows you to sell your insurance policy to a third party in exchange for a reduced amount of the face value. This is possible because a life insurance policy is actually property, like a car, house, stocks and bonds that can be legally sold. A life settlement essentially lets you extract value today from an asset that is generally thought to only have a benefit when you die. Typically, life settlement transactions involve life insurance policies of a large face amount; “key-person” coverage or corporate-owned life insurance; or policies representing excess coverage that is no longer needed.

Here’s how a life settlement works: When a life settlement company buys your life insurance policy, it pays you a percentage of the policy’s face value. Then the life settlement company becomes the new beneficiary of the policy at maturation. As such, it is responsible for all paying all future premiums and collects the entire death benefit when the insured dies.

A Growing Industry

With a life settlement, you can receive a large sum of cash in exchange for your insurance policy while you’re still alive. This eliminates premium payments, accommodates the changing needs of your dependents and provides greater financial flexibility.

Life settlements can also be used for charitable giving. Complex estate and tax planning strategies can apply when using life settlements in a planned giving program. But here’s how this works in simplest terms: You donate your life insurance policy to a charitable organization, which immediately sells the policy for a lump sum of cash via a life settlement.

These and other benefits are making life settlements an attractive option for seniors with unwanted/unneeded insurance policies. Consequently, the life settlement industry has seen significant growth in recent years. A study by Conning & Co. Research found that senior citizens owned approximately $500 billion worth of life insurance in 2003, of which $100 billion was owned by seniors eligible for life settlements. Since 2003, more and more of these eligible senior clients have sold their policies and helped the market increase.

Separate research by the University of Pennysylvania’s business school found that life settlement providers paid approximately $340 million to consumers for their underperforming life insurance policies, an opportunity that was not available to them just a few years before. “We estimate that life settlements, alone, generate surplus benefits in excess of $240 million annually for life insurance policyholders who have exercised their option to sell their policies at a competitive rate,” according to the research.

Selling Your Policy

You could be a prime candidate if you are of retirement age, have paid off your mortgage and other debts, and no longer require the financial protection of life insurance. The amount you receive will depend on your age, health, death benefit, and the number of years your policy has been in force.

Seniors with the greatest chance of selling their policies are those that are older than 65 years of age, have a calculated life expectancy of more than two years (but less than 10 years) and may have experienced a health change that has led to their insurance premiums increasing. Depending on the policy holder’s life expectancy, just about any type of policy can be sold, including universal life, whole life and convertible term contracts. However, policies generally must be valued at least $100,000.

Determining whether to sell your life insurance policy is a purely personal decision. You might consider a life settlement under the following circumstances:

Your employment status has changed.

You need additional funds to pay medical/long-term care expenses.

Your insurance premiums are too expensive and you can no longer afford them.

You would like to implement a charitable or family gifting plan.

You are facing bankruptcy.

Consulting with an Advisor

Before you decide to sell your insurance policy, you should examine all the available options, advises the American Council of Life Insurers, a Washington D.C.- based trade group. And instead of going it alone, consult with a financial advisor who is familiar with life settlements. This could include account/CPA, lawyer (especially elder law attorney), financial/estate planner, certified senior advisor or charitable trust officers.

Additionally, you might consider working with a brokeralthough your financial advisor can submit your case to the life settlement company directly. However, in an industry where market value for life insurance policies may be unfamiliar, brokers typically do the best job of getting fair market value for policies. They submit life settlement cases and bids to multiple companies, which can facilitate negotiations between high bidders.

Keep in mind that life settlement companies are essentially investors that fund many transactions each year. They hold purchased policies as portfolio assets, rather than making them available to outside investors. They also have in-house compliance departments to carefully review transactions, and they are backed by institutional funds from a major bank.

Steps to Life Settlement Transactions

Wondering what happens during life settlement transactions? Here are the steps involved in the typical transaction:

Step 1: You consult with an advisor and decide to sell your policy.

Step 2: You and your advisor select a broker.

Step 3: The broker submits your case (and you provide a release for your medical information) to various companies.

Step 4: If your policy is eligible for a life settlement, providers send offers to the broker.

Step 5: You accept an offer and then complete the company’s closing package.

Step 6: The life settlement company places a cash payment in escrow and submits change of ownership forms to the insurance carrier.

Step 7: Once the paperwork is verified, the funds are transferred to you.

David Springer is a consultant for Sovereign Funding Group. Sovereign Funding Group is an experienced, reputable company that offers convenient, no-risk services to help you with the selling of your deferred payments and business financing, including life settlements.

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Nowadays, life is full of surprises… some are good while others can be quite bad such as a car accident, important health problems or even worse. The last thing that you want is getting stranded or even your family with huge bills to pay and having a hard time making the ends meet. You can make a difference by protecting your loved ones with insurance.

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Recent stories in the press have again lambasted the insurers over critical illness insurance. The core problem is that a critical illness claim is not as straightforward as, for example, a claim under life insurance. With life insurance it’s going to be hard for the insurance company to argue that you’re not dead!

By their very nature, critical illness claims are much more complicated. The insurer will need to satisfy itself that the claim is validated in three key areas before it meets the claim: -

Has the illness been correctly diagnosed?

Is the confirmed illness included in the schedule of insured critical illnesses covered by the policy?

Did the policyholder fully disclose their medical history and current state of health on their original application form?

On the first point, it’s obviously in the policyholder’s interest to verify the medical diagnosis - so there’s rarely ever any conflict between the insurance company and the policyholder on that issue. It’s the next two areas which the insurer needs to validate, where conflicts seem arise.

With constant development in the medical knowledge, from time to time there can be some situations where validation falls into a grey area - a policyholder will argue that their specific illness is insured whereas the insurer will argue that it isn’t. Insurance companies are aware of this problem and they often change the wording in their policies in an attempt to clarify the scope of the cover and eliminate areas for dispute. Nevertheless, disputes do happen all too frequently and sparks fly when a policyholder thinks his illness is covered but the insurer disagrees.

A case in point comes before the Courts shortly. Mr Hawkins from Staffordshire is suing Scottish Provident for ?400,000 under the terms of his critical illness policy. Basically, his medical advisers believe his illness is insured whereas the insurers’ medical advisers disagree. If the Court find in favour of Mr Hawkins the press will have a field day - and the critical illness insurers will suffer further bad press they can sorely afford.

Another summons, filed recently in the High Court and again involving Scottish Provident, highlights the problem when an insurer considers that a claimant mislead them on his or her original application form. Our understanding is that if an applicant omits relevant information or provides misleading information on their application from, this amounts to obtaining insurance on false pretences. This summons has been issued on behalf of Thomas Welch from London who is suing Scottish Provident for ?206,800. The issue goes back to 2000 when, a few years after first starting his critical illness policy, Mr Welch received confirmation that he was suffering from testicular cancer. The insurer refused the claim because of “non-disclosure alleging that Mr Welch had not been honest about his smoking habit. He does admit that he did smoke earlier in his life but is resolute in saying that he had long since given up when he applied for critical illness insurance. As such, Mr Welch believes that he did complete the application honestly.

We assume that the case will centre upon whether Mr Welch accurately answered the smoking questions on his application. Most insurers define “a smoker” as someone who has smoked, or has otherwise used, nicotine products within the previous 5 years. (Some insurance companies adopt a 1year cut off.) If Mr Welch had indeed smoked during the specified years, he would have been obliged to disclose such information on the application and the insurer would have priced his insurance accordingly. In this context, it is relevant to note that smokers are charged as much as 65% more for critical illness over than non-smokers. We anticipate that Mr Welch’s lawyers will argue either that he did not smoke during the period in question or he omitted the smoking information by pure oversight and in any event, his past smoking is not irrelevant to his testicular cancer. Interesting issues and we’ll let you know the outcome.

Mr Hawkins case is fundamentally different. It illustrates the problems that can arise if policy documents imprecisely describe an illness or if the technical diagnosis of an illness provides the scope for medical professionals to disagree. Either way the issues are entirely outside the policyholders control at a distressing time for them and their families and we must appreciate their anguish. The long-term solution must lie in improving the medical definitions within the policy. It is probable that this will result in more medical jargon that the average man in the street will find difficult to understand - but perhaps that is preferable to what Mr Hawkins is going through.

Mr Welch’s court case must stand as a clear reminder to everybody that applications for insurance must always be totally accurate and completed in good faith. We recognise that in some cases this may still leave room for dispute (and Mr Welch’s case may be an example), but if an applicant fails to complete the forms accurately, they are taking the great risk and any claim they make could be rejected.

Rightly or wrongly, the newspapers have a history of giving the insurance companies a hard time, casting them as heartless big business. This serves to reinforce the public’s feeling that insurance companies are devious and not to be trusted - especially it seems, in respect of critical illness insurance. This view is reinforced by the fact that around 20-25% of critical illness claims are rejected (although this rejection rate does vary between insurers). This issue is something that insurers must come to grips with - it’s bad for clients and undermines confidence in insurance - and that must be bad for the development of the insurance industry.

In fact to put no finer point on it, it’s a tragedy. As many as 1 in 6 women and 1 in 5 men will be diagnosed with a critical illness before their normal retirement age*. As such, critical illness insurance is vastly important for the protection of family finances. The problems we have highlighted are obviously contributing to a situation where almost everybody needs critical illness insurance, but fewer and fewer of us are taking it up.

(* Source: Munich Re.)

Michael writes for Express Life Insurance who offer life insurance quotes and critical illness insurance. Click here for more life insurance topics

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