Seniors can put their life insurance policies to work for them, selling the policies rather than surrendering them to the insurer to generate needed income.
The ways to sell a policy have different names and work in slightly different manners, too. The Minnesota Department of Commerce, which regulates the insurance industry, says seniors should research their options before entering into one of these arrangements. Department spokesperson Libby Caulum offered the following information:
•In a “viatical settlement,” a policyholder who is chronically or terminally ill receives immediate cash – less than the full amount of the death benefit –in exchange for the sale and transfer of policy ownership rights. The individual or company that buys the policy pays the premiums and collects the full amount of the death benefit from the insurance company.
•Many insurance companies are making “accelerated death benefits” available to policyholders. The company pays the benefits as a percentage of the policy’s face value, minus any outstanding policy loans. These benefits may make the policyholder ineligible for Medicaid or other government benefits, and may be taxable. Caulum suggested consulting with a legal or financial advisor before entering one of these agreements.
•In a “life settlement,” the policyholder sells the policy to an investor in exchange for a lump sum payment, generally less than the death benefit on the policy, but more than its cash surrender value. The amount offered by the investor usually takes into account the insured’s life expectancy (age and health) and the terms and conditions of the insurance policy.
•Stranger-Originated Life Insurance (“STOLI”) arrangements are NOT traditional life insurance policies. Instead of buying the policy for oneself, an investor group — strangers — initiates the insured’s application and will likely acquire an interest in the life (and possibly profit from the death) of a participant. The participant may receive an immediate lump sum payment, or his/her beneficiaries may receive a partial payment of the policy’s face value upon the participant’s death.
Investors typically call STOLIs by other names, such as “zero premium life insurance,” “estate maximization plans,” “no-cost-to-the-insured plans,” “new-issue life settlements,” “high net worth settlements,” or “non-recourse premium finance transactions.” Whatever the name, STOLI arrangements are typically promoted to consumers between the ages of 65 and 85.
GWG Life Settlements of Minneapolis offers life settlements as well as retained death benefits to people whose life expectancy is 10 to 20 years, according to GWG board member Jeffrey McGregor.
Some of the early efforts to buy others’ life insurance policies fell short of the insurance industry’s ethical standards, McGregor said.
“We’re feeling more like we’re operating more like a traditional investment than the way the business first started,” he added.
Seniors have much to consider before entering one of these arrangements, but should call the commerce department’s Consumer Services Center at 651-539-1600.to ask if the person or business interested in buying their policy is licensed to do so in Minnesota. Other considerations include:
•Was the policy was originally purchased to ensure the financial survival of the consumer’s spouse and children? If not, are there other reasons to keep the policy?
•What are the current/future financial needs of the consumer and their beneficiaries?
•Other options may be better, such as borrowing the cash value of the policy or cancelling the policy and taking out the cash value.
•Creditors may try collecting what they are owed from life insurance payouts.
•Selling a policy may have tax implications. Caulum suggested contacting a tax advisor.
Nancy Crotti is a freelance writer in St. Paul