As seniors continue to suffer from the economic downturn, more of them are cashing in their life insurance policies in order to pay medical bills and other expenses. Senior policyholders last year sold a total of $11.8 billion worth of life insurance, nearly twice what was sold two years earlier. According to Doug Head, executive director of the industry group Life Insurance Settlement Association, selling a policy maybe an attractive option for seniors who determine they no longer need life insurance coverage.
A life settlements transaction is usually handled through a broker who offers the policy to investment companies. These companies agree to pay an amount which is usually several times what the policyholder would receive if he or she were simply to surrender the policy to the insurance company, Head explained. The investment companies continue to pay the premiums and receive a payout when the policyholder dies. Whether or not to sell a policy on the secondary market, however, requires the advice of an independent financial advisor, who can help determine whether such a sale would be in the best interests of the policyholder.
“If you’re thinking about selling your life insurance mostly because you’re strapped for cash, there may be other ways to tap the value of your policy without losing your coverage,” according to David McDowell, a lawyer and insurance expert. “You may be able to take out a loan against your policy or receive a partial payout through an accelerated death benefit. It’s worth visiting with your life insurance agent and exploring the options before sacrificing your coverage.”
The life settlements business began with the AIDS crisis of the 1980s, when some AIDS patients sold their policies in what were termed “viatical” settlements so that they could use the cash for the expensive medications or treatments that were used to treat the disease. Later, according to Scott Gibson of Lewis and Ellis, an actuarial consulting firm in Richardson, the industry expanded its purview to include seniors. “The best candidates for a life settlement are now people in their 70s or older who have a life insurance policy valued at $500,000 or more that they no longer need, perhaps because their spouses have passed away,” said Gibson.
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Earlier this year, the industry faced a cash crunch as investment dollars dried up, but now that investors have returned to the market, offers for policies have improved, said Russel Dorsett, co-managing director of the Select Life Settlement Corp. in Houston. The amount a senior can expect to receive varies based on the policyholder’s age, gender and health, but payouts tend to be just short of 20 percent of the policy’s death benefit, said Dorsett. “That’s still three or four times more than they’d get if they simply surrendered their policies to the insurer.”