Selling Your Life Insurance Policy

There are two types of life insurance. There is the policy that lasts for only a specific period of time and builds no cash value and the policy one can own until death and builds a cash account. All insurance policies are modifications of either term life or whole life. Until the last few decades the only options people had with their insurance policy, if they did not want it, was to use any cash to buy a paid up policy or send it back to the insurance company and surrender the policy for whatever cash had accumulated.

Almost everyone who has borrowed money from a bank or relative knows  you can assign a policy for a debt or obligation to someone or something as long as the owner of the policy is copacetic with the assignment. Someone somewhere decided if that was the case why not buy a life insurance policy from a complete stranger who was ‘really’ sick,  make themselves the beneficiary and owner, pay premiums until that person died and then collect the death benefit. Comparing how much money an insured would get from simply cashing the policy for its value versus selling it became a living boon to the policyholder. A future windfall for investors.

The problem was picking a specific morbid illness that the investor knew someone was going to die in a relatively short period of time. What disease, wondered investors, was 100% fatal with many prospects? The answer, back in the day, was AIDS. Buying insurance policies from AIDS patients was a huge moneymaker. It was a slam dunk. The insured's needed the money for medicine and treatment, the policies only needed to be paid by investors for a relatively short period of time and the return on investment was guaranteed, and huge.

Then modern medicine got into the mix and patients started living longer, some even improved and investors found themselves paying premiums for far longer then they expected which, naturally, cut into their returns.

Innovators then turned their attention to another group of people the elderly. Here was a group of folk that had outlived their need for insurance, contemplated dropping it and wanted cash for living expenses more than a future death benefit. This was so well received that some old poops got into the business of buying  life insurance on themselves simply to sell it to investors.

Seniors selling their insurance became such a huge hit with investors that major institutional investors gathered a few years back in New York to consider buying en masse blocks of life insurance and repackaging them as  bonds. Ghoulish? You bet but when looking at possible annualized returns close to double digits it suddenly became very palatable.

Naturally the life insurance companies are not thrilled by what was happening. They were not about to allow investors manipulate a well designed actuarial plan in the name of commerce. Insurance companies need  and want people to cancel policies before they die not keep or sell them. The last thing insurance companies want is someone to actually have a claim. Insurance companies are in the money of collecting and investing premiums and not in the claims paying business.This is all calculated into the premiums people pay. If everyone who bought a life insurance policy held it to final maturity it would make the premiums much more expensive then they are today. Plus, the insurance death benefits currently on the books could possibly bankrupt several insurance companies.

The other cogs are the beneficiaries who suddenly develop convenient amnesia when a death claim occurs and they see huge life insurance benefits going to strangers. There are hundreds of court cases with whining family members demanding that what mom, pop or aunt Sally did was illegal or a result of some slick talking shyster who conned their beloved relative out of their life insurance policy.

A case in point is the Kramer family in New York where the wife Alice is refusing to give up the death certificate on her deceased husband who had taken out and sold over $56 million in insurance coverage. Mr. Kramer knew full well what he was doing as he was founder of the law firm that bears his name. In fact Kramer used some high priced talent to buy and sell the policies, almost like flipping a house, and putting the cash into Trusts with his children as beneficiaries. It is alleged that Kramer did not put a penny into any of the policies and established an entity of ‘strangers’ to buy the policies on his life that he ultimately sold. The wife demands that she and not the kids or Trust get the insurance benefits. Experts contend that she may get some but certainly not the full face amount.This is a complicated, convoluted and not textbook life insurance settlement. The case involved 7 life insurance policies along with 4 life insurance companies. It all reads as if Kramer had gamed the system and allowed his family to clean the center ring after the circus left town.

No one knows if what the Kramer case is something that was concocted by both Kramers before he died or something that just happened after his death. To avoid something like this most life settlement companies have beneficiaries sign off on the policy.

Still there are plenty of folks in the life settlement business, that will attempt to take advantage of a situation so it is suggested that you do your homework when you enter into any discussion about selling your life insurance policy. Remember it is not illegal to sell your life policy. A lawyer, accountant and financial advisor on your side of the table will help with any business inequities. Here are a few more tips before you start the process:

1. Check with your state for any licensing regulations for life settlement brokers.
2. Do you still need life insurance? Can you buy new life insurance?
3. What information will the purchasers receive about you and your family and how will it be used.
4. The proceeds may not be tax free. Check with your advisor.
5. Creditors may be able to attach proceeds.
6. Will you lose public assistance or Medicaid if you get a cash settlement?
7. Establish an independent bank to handle escrow while funds and policy are being transferred.
8. Always use an advisor for your negotiations.

If you have questions call Paul at 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.