ESTATE TAXES
PROVIDED BY KEVEN PRATHER, CFBS
Time to Sell That Life Insurance Policy?
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THE LIFE SETTLEMENT PROCESS
ou know that life insurance policy you’ve been paying for all these years? It could get you a nice sum of money now — while you’re still around to use it. That’s because you may be able to sell your policy for cash through a process known as a life settlement. Here’s how it typically works: • Most types of life insurance policies can qualify for a life settlement — including universal life, whole life, variable life and term life.
• That payment is more than your policy’s cash surrender value (the money in the cash account) but less than the death benefit the insurance company would pay out if you died.
While not extremely well-known, life settlements are becoming more common — especially among some affluent households that have insurance policies meant to pay their estate taxes down the road. The reason: The Tax Cuts and Jobs Act of 2017 increased the estate tax exemption to approximately $11 million for individuals and approximately $22 million for couples.
• Tax law changes have made life settlements more attractive to more people — especially the affluent.
1. Screening. This is a preliminary analysis to eliminate situations where a life settlement is clearly not appropriate.
• Your health and life expectancy play major roles in the amount of money you’ll be offered for your life insurance policy.
• You sell your policy to a life settlement investment fund for a one-time payment.
• The investment fund takes ownership of the policy, pays the ongoing premium payments, and pockets the entire death benefit when you pass away.
• Life settlements can help life insurance policyholders liberate cash that is currently tied up.
The amount of money you might be paid for your policy depends on several factors — including the policy’s face value and premiums along with your life expectancy. Getting a life settlement payment is a five-step process:
That higher amount means more families may no longer need life insurance they’ve earmarked to pay the federal estate tax—so they’re selling their policies for tidy sums. REASONS TO CONSIDER SELLING YOUR EXISTING LIFE INSURANCE If you have a life insurance policy you no longer need or want, you can surrender it to the insurance company and receive its cash value or you can let the policy lapse. However, as noted above, a life settlement is almost always the superior choice economically. Chances are, you’ll get more money if you go this route.
That higher amount means more families may no longer need life insurance they’ve earmarked to pay the federal estate tax — so they’re selling their policies for tidy sums.
People sell their life insurance policies for a variety of reasons. If you find yourself in one or more of these situations, it probably makes sense to at least consider a life settlement:
Here’s a closer look at life settlements, along with advice that can help you decide whether they may be a smart move for you.
• The face value (or death benefit) is no longer needed due to the death of a spouse, divorce, changes in the tax
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HVACR BUSINESS AUGUST 2020
code or other circumstances. • The premiums are no longer costeffective or affordable. • Money is needed to finance retirement or other lifestyle benefits. • The money can be better used for gifts to loved ones or philanthropic concerns. • The money is needed for medical treatments or other large expenses. The caveat: Life settlements are generally for seniors usually no younger than 65. That’s because a company that buys policies doesn’t want to be stuck paying premiums for decades as it waits to collect on the death benefits. Put more simply, you’ll probably get a better offer if you’re old and in relatively poor health.
2. Collection of information. Your life insurance and your health are evaluated. 3. Life expectancy report. Using this information, a life expectancy report — a mathematically calculated projection of how long you will live — is produced. 4. Life insurance policy analysis. Your life insurance policy is evaluated in the context of your life expectancy report. 5. Value calculation and offer. The current monetary value of your life insurance policy is calculated, and you are made an offer by the fund. There are three types of life settlement payouts: • Cash for your life insurance policy. This is the most common life settlement payout. You receive a single payment for your policy and give up any future benefit from it. • Retained death benefit. Using this approach, you will not get any money. Instead, you no longer have to pay premiums. Upon your death, your beneficiaries will receive part of the life insurance policy’s death benefit. • Hybrid. This approach is a combination of the two previous payout types. 6. Decision. In the sixth and final step, you make the decision whether or not to accept the offer.
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