Life Settlement Questions & Answers

Q: What is a Life Settlement?
A: The industry defines a life settlement as the purchase of an in-force life insurance policy insuring an individual who does not suffer from any life-threatening condition, purchased prior to maturity (death of insured) at a discount of the policy's net death benefit. By comparison, a viatical policy is classified as one where the insured is diagnosed terminally ill and has a life expectancy less than two years. For a life settlement, the insured may be in moderate or even good health, with a life expectancy in excess of two years.
Q: Who qualifies for a Life Settlement?
A:Policy Owners age 65 and older who have maintained a life insurance policy for 24 months or more. If a policy has been allowed to lapse within the last 12 months or less than the policy can be reactivated for the balance of premium payments due.
Q: Is there a minimum amount of life insurance that can be settled?
A: Yes, the minimum face value, or death benefit, of a life insurance policy eligible for a Life Settlement would be $50,000.
Q: What type of life insurance qualifies for a Life Settlement?
A: Almost every type of life insurance contract is eligible, including: Universal Life, Whole Life, Variable Life Survivorship, (any type) Adjustable Life Joint First to Die Term (if convertible)

Q: Am I responsible for paying the premiums after I have settled a life insurance policy?
A: No, the entity that purchases your policy will be responsible for paying the premiums and you will be relieved entirely of that responsibility.

Q: What happens to the proceeds of the life insurance policy when the insured dies?
A: The total payout of the life insurance policy will go to the financial institution that purchases the policy from the owner through the Life Settlement process.

Q:Are the proceeds from a Life Settlement taxable?
A: The proceeds from a Life Settlement transaction can be taxable. Typically, the taxable proceeds are based on the difference between the cost basis of a policy (the money paid in) and the cash "surrender" value and the final settlement amount received by the policy holder as to what is considered taxable. Any tax implications for capital gains realized from such a transaction could be offset by tax deductions based on "the entire cost of maintenance in a nursing home or home for the aged" (sec. 1016 U.S. Master Tax Code 2008). In the case of a viatical settlement where the policy owner has a terminal diagnosis and life expectancy of 24 months or less, the proceeds are tax free. Please remember that these are general guidelines and cannot be relied upon as fact. Unions.org strongly recommends that a policy owner seek professional tax advice prior to accepting any offers.

Q: When is it time to consider cashing in a life insurance policy for its Life Settlement value?
A: If a policy owner has outlived the purpose of a life insurance policy, has decided that it has become an under-performing asset, or has had a life event that requires liquidity-- then selling a life insurance policy through a Life Settlement transaction should be considered.

Q: What are some common circumstances for initiating a Life Settlement?
A: Some common circumstances that others encountered when initiating a Life Settlement include: Does the policy owner require funding to pay for senior housing and long term care needs? Is the policy owner planning to surrender or lapse a policy? Have insurance needs changed? Has the insured outlived his/her beneficiaries? Are premiums now unaffordable? Has the insured's health status changed since policy inception? Does the insured need new life insurance, annuity or long term care coverage? Does the insured wish to give to charity while they are still alive? Are estate taxes changing? Is the insured a retiring "key-man" or selling a company/partnership?

Q: Are there any restrictions to a Life Settlement?
A: Other than the qualifying criteria, there are no restrictions to a Life Settlement. A life insurance policy is personal property and the owner is free to transfer ownership for the highest possible value. There are no restrictions to the use of funds as a Life Settlement is not a loan, nor a government subsidized program, or a long term care insurance policy.

Q: Are there any restrictions to how the money derived from a Life Settlement can be used?
A: None, the money derived from a Life Settlement are the result of the sale of personal property and the proceeds as such can be used in any manner the recipient desires.
 
Q: What are the rights of a policy owner?
A: A life insurance policy is legally protected as personal property and the policy holder has the guaranteed right to manage and sell their ownership interest in a life insurance policy without limitations-- and at the highest possible value. All insurance policy owners have the following rights: Name the policy beneficiary Change the beneficiary designation Sell the policy to another party Assign the policy as collateral for a loan Borrow against the policy

Q: How does a Life Settlement compare to other funding options for seniors?
A: Life Settlements offer the highest payment possible based on an existing policy, no restrictions on use of funds, no requirement for re-payment, no upfront fees, no requirements to be below set asset and income levels, and the price for a policy is determined in the open market through a competitive bidding process involving multiple financial institutions.

Q: Is a Life Settlement like a Reverse Mortgage?
A: Both funding options are similar in that they are vehicles to access cash from an existing asset—but there are some very distinct differences between the two that are important to understand: Reverse Mortgages defined by the U.S. Department of Housing and Urban Development (HUD): A reverse mortgage is a loan that will accrue interest and fees(origination fee, appraisal and inspection fees, title policy, mortgage insurance and other normal closing costs)-- and must be paid back once the homeowner no longer occupies the home as their primary residence. The size of reverse mortgage loans is determined by the borrower's age, the interest rate, and the home's value. The older a borrower, the larger the percentage of the home's value that can be borrowed. The amount that may be borrowed is capped by the maximum FHA loan limit for each city and county varying from $172,632 in rural areas to $362,790 in many major metropolitan areas. The Federal Housing Administration, which is part of HUD, collects an insurance premium (2% on average) from all borrowers as part of the financing agreement. Life Settlements defined by the Life Insurance Settlement Association: A Life Settlement is the sale of personal property, not a loan, and has no restrictions or requirements to be secured or paid back. There are no caps on the amount of money that can be raised through a life settlement. There are no interest fees, guarantees, or liens associated with a life settlement. There are no upfront fees paid by the policy holder. Funds derived through a life settlement can be taxable. A life settlement involves signing over the death benefit to a third party that will continue to pay the policy's premiums until they collect the full value upon policy maturity.

Q: Are the proceeds from a Life Settlement taxable?
A: The proceeds from a Life Settlement transaction can be taxable. Typically, the taxable proceeds are based on the difference between the cost basis of a policy (the money paid in) and the cash "surrender" value and the final settlement amount received by the policy holder as to what is considered taxable. In the case of a viatical settlement where the policy owner has a terminal diagnosis and life expectancy of 24 months or less, the proceeds are tax free. Please remember that these are general guidelines and cannot be relied upon as fact. Unions.org strongly recommends that a policy owner seek professional tax advice prior to accepting any offers.

Q: Can Life Settlements impact eligibility for social assistance programs?
A: Funds derived through a Life Settlement may affect eligibility for public assistance programs such as Medicaid, aid to families with dependent children, supplementary social security income and AIDS drug assistance programs. It is important to note that life insurance is characterized as an "unprotected" asset for Medicaid applicants and the value of a policy typically exceeding $2,000 will count against the applicant's minimum allowable asset level. Many states require that life insurance policies be cashed in and the proceeds be spent down on care before Medicaid benefits will cover the cost of senior care. Every state's Medicaid requirements vary and Unions.org strongly recommends that a policy owner consult with the appropriate social services agency or a financial advisor concerning how ownership of a life insurance policy and a subsequent Life Settlement could affect your eligibility and that of your spouse or dependents.