Windsor Life Settlements, LLC has been in the life settlement business a long time. Over the years, our brokers have heard many various reasons as to why their clients sell a life insurance policy. However, on many occasions, even after going through the life settlement process and fielding multiple purchase offers, it still makes more financial sense for a client to keep their policy.
Life settlements can be a source of confusion at times. The industry has certainly had its ups and downs only recently cleaning up its act with new laws and regulations aimed at increasing transparency for all involved parties helping consumers feel safe. This has resulted in a tremendous boost in consumer confidence, increasing both the number of qualified policyholders and the number of life settlement providers entering the life settlement marketplace.
So, in the spirit of transparency, it’s important to understand when it makes more sense to sell a policy and when it makes more sense to keep it. Our life settlement brokers Cindy Deacon, Edie Hanzel, and even our CEO Ken Kelly offer reasons that their clients over the years have elected to keep a life insurance policy rather than seek and complete a life settlement. If you’re curious about the value of your policy, you can get an immediate quote using our new life settlement calculator to help determine if your policy qualifies.
First and foremost, selling a life insurance policy later in life is probably not the reason you bought a life insurance policy in the first place. In most cases, our clients seeking a life settlement report that the policy was originally purchased to benefit their children, grandchildren, spouse, or other loved one who may or may not be financially dependent on you. So, the idea of selling that policy to a stranger, in many ways, can be a divisive issue among families. Our client, Ted Muller, wrote about this issue in his well-documented life settlement experience stating “Upon learning of my life settlement some close family members accused me of being unethical, and that buying and selling one’s demise was both socially and morally unacceptable.”
This is a very understandable position for a concerned family member to take. It’s hard enough seeing your parents age and get older, now to be faced with decisions involving both their health and finances can be stressful, to say the least. Imagine being unfamiliar with life settlements and then learning that your parents are looking to sell their life insurance policy. This will just about always be cause for concern among families and understandably so.
Ted’s advice: “Be prepared to have these discussions.”
Even after completing the life settlement process and receiving competitive offers for a policy that might alleviate one from medical bills etc, this is still the number one reason people decide not to sell a life insurance policy.
When you first bought your policy you had a specific beneficiary or beneficiaries that you wanted to provide money to at the time of your death. Even if your children/beneficiaries are now fully grown and financially independent, a life settlement still eliminates the financial benefit realized by beneficiaries which can cause family distress.
“Upon learning of my life settlement some close family members accused me of being unethical, and that buying and selling one’s demise was both socially and morally unacceptable.” – Ted Muller
Another reason people have elected to keep a policy in force is that the policyholder may owe substantial debt to creditors that can be seized to repay the balance. Occasionally, a beneficiary has even co-signed loans with the insured. So, depending on the state, creditors can potentially file a lawsuit against the beneficiaries in order to receive the amount that is owed. If you list your “estate” as the beneficiary of your life insurance, or if the beneficiary you have named has already passed away, your life insurance payouts can be particularly vulnerable to creditors.
In some states, life insurance is protected from creditors, meaning creditors cannot garnish the benefits of your policy to pay for your outstanding debts. However, some states only offer limited protection for life insurance. In the state of Texas, for example, a life insurance policy’s cash value and death benefit are completely protected from creditors, meaning that the policy cannot be garnished to repay old creditors. In the state of Florida, however, protection from creditors is limited.
For those who owe substantial medical bills and have significant debt, the proceeds from the life settlement can be seized to repay those debts depending on where you live.
However on the other hand, paying off debt is a core reason to seek a life settlement in the first place.
Many of our clients will sell a life insurance policy with the expectation that the financial gain will see them through to the end of their lives. This is not always the case. “Life expectancy” continues to increase, making outliving the proceeds a possibility.
Additionally, many clients are discouraged early in the life settlement process, reporting shockingly low offers from insurance companies and direct to consumer companies for an otherwise valuable policy. Most clients begin their life settlement experience by seeing a television commercial informing them of the life settlement option. In most cases, these TV commercials are produced by companies who buy policies directly from the insured. After making inquiries with said companies, clients report offers less 15% of the face amount!
It’s easy to condemn these companies for “low-ball” offers but after considering the speed at which that cash is available to you, this still might be the best option. Many clients seeking a life settlement have significant or even terminal illnesses and frankly don’t have the time or energy required to pursue a higher offer by hiring a life settlement broker.
So, rather than sell for a low offer or spend 2-3 months completing the life settlement process to seek a higher offer, a policyholder may just elect to keep the policy in force and avoid the headaches altogether.
Depending on the current tax code, the proceeds from a life settlement might taxed as income. Taxes are assessed at the state level and can vary from state to state. In many cases, the total amount of premiums is subtracted from the total settlement amount and the overage is taxed at regular income tax rates rather than as capital gains.
At Windsor, we hesitate to provide tax advice because frankly we are not tax professionals and we can’t afford to be wrong about this key consideration when deciding to sell your life insurance policy. However, a recently passed life settlement tax law seemingly benefits consumers by fundamentally restructuring how proceeds are taxed, resulting in higher payments and less taxes.
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