 By Frank Darras Not surprisingly, many Americans are looking to cut their expenses to survive the economic downturn. This can be particularly true for seniors, who may not be able to live long enough to recover their losses. Is it worth it for individuals to cash in their life insurance policies to receive some economic assistance? This can be a difficult question to answer, and requires some serious consideration and a weighing of pros and cons. These days, the industry for “life settlements” is booming. Because life insurance premiums remain substantial, continuing to pay for these policies does not have the investment return once projected. Life insurance for many people over age 60 has become a burdensome expense, especially as people live longer and longer into their retirements. Life settlements may offer a solution to senior policyholders. A policyholder who opts for a life settlement can often receive more cash than available in the policy’s surrender value. Because the true value of the life insurance is redeemable upon death, insureds can benefit more by realizing that value now, when they need the money and while there is a market for their policy. The dollar value an individual receives when selling his or her life insurance policy to a company for a deep discount is determined based on that individual’s current medical situation and on their life expectancy. The shorter the policyholder’s life expectancy, the higher the payout. The company or investors take over the payment of premiums and collect the full death benefit when the insured dies. There are four scenarios in which a life settlement might make sense: 1) You have a catastrophic illness, expect to live two years or less and need money to pay expenses in the interim. 2) You’re in dire financial shape, and the insurance policy is your only remaining asset that can be turned into fast cash. 3) You can no longer afford the premiums and the policy is in jeopardy of lapsing. 4) You get “a truly terrific deal” that gives you significantly more dollars than the surrender value of the policy. Originally, the life settlements industry was born in the 1980s in response to the AIDS crisis, when dying patients desperately needed cash to pay for expensive treatment. As AIDS became a more treatable disease, the industry expanded to include other terminal illnesses. People suffering from cancer, heart disease, Alzheimer’s disease and other progressive illnesses, as well as elderly people in need of funds for assisted living, found life settlements to be a useful source of immediate cash. Of course, if you are healthy and relatively young, the payout may not be worth the trade off. People considering life settlements should think about how the generated funds can be used to plan for their futures. You should check into the tax implications of making this move, as you may have to pay higher income taxes as a result of the settlement. You should also find out if your eligibility for Medicare or Medicaid will be affected. It’s important to get any life settlement offers in writing, and to research the company you are working with. Also, make sure that the agent’s or broker’s commission is disclosed in writing. As always, be sure to consider getting sound legal advice before taking such a big step with your financial future. Page: 1 of 1 pages for this article
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