Life Settlement Guide

A life settlement can incur taxes. Therefore, taxes should be a factor when considering a life settlement.

Tax laws change, therefore we advise you to consult with your tax advisor before moving forward with a life settlement.

As of June 2021, 42 U.S. States regulate life settlements. These regulations are overseen by the state’s Department of Insurance.

Rules may include when you would receive your money or how the transfer of ownership takes place. Your state may also regulate how much commission your broker can receive.

If you reside in a state that regulates life settlements, a broker or buyer must follow these rules.

These rules are meant to protect you, the seller, as well as the buyer.

As of June 2021, some states require you keep a policy for a minimum number of years. This prevents you from taking out a policy for the sole purpose of selling it.

If you live in one of the following states, you have to wait at least five years before you can sell your policy:

• OR
• NV
• ND
• NE
• IO
• WI
• OH
• WV
• NH
• FL

If you live in Minnesota, you have to wait at least four years.

These states do not regulate life settlements. Thus, no waiting period exists other than the two-year contestability period and suicide provisions.

• AL
• MI
• MO
• NM
• SC
• SD
• WY
• Washington D.C.

All other states require that you wait at least two years before selling.

You still may be able to sell your policy during the mandatory waiting period, if your state has one. Some of these states allow exemptions. Such events include recently retired or divorced or the death of a spouse. Other major life events may apply.

You can check with your state’s Department of Insurance to find out its rules for life settlements. You can also consult with a financial advisor or life insurance broker licensed in your state.

Most states have laws that require brokers and buyers to disclose important information to you. In other words, they must be truthful in the facts regarding your policy.

• all offers, counter-offers, acceptances and rejections from buyers
• your lump sum being subject to creditors’ claims
• the rescission period, which is the number of days to change your mind after the sale
• the amount of their commission from the sale
• other options besides selling your policy

All life settlement brokers must hold a license in life insurance. They must also have an additional life settlement license. The license in life settlements usually requires the broker to have additional training and experience.

Depending on your state, your broker may also have a fiduciary duty to represent you. A fiduciary duty means they are legally required to work in your best interests, not the buyers.

This is an important consideration. We advise you to work with an individual who acts as a fiduciary.

Be sure to check with your state’s Department of Insurance to verify that your broker is properly licensed. You can also check with your state regarding your broker’s fiduciary duty.

The Life Insurance Settlement Association (LISA) is a non-profit organization. It consists of brokers, buyers, financing entities, and other service providers related to life and viatical settlements.

LISA educates consumers and advisors about life settlements.

Your broker earns a commission for helping to sell your policy. Their fee is a percentage of one of the two most common values:

• Percentage of the face value of the policy. The face value is the original death benefit. It does not include any outstanding loans against the policy.
• Percentage of the sale price of the policy. Since the sale price is a much smaller amount than the face value, a higher percentage is used.

The percentage of broker fees ranges from 6%-10% of the policy’s face value or 30% of the offer.

For example, if your policy’s face amount is $500,000 and you receive an offer for $120,000, the fees could be calculated like this:

$500,000 X 8% of the policy’s face value = $40,000

OR

$120,000 X 30% of the offer = $36,000

A broker usually charges the lesser of these two fees.

They would charge $36,000 for the sale of this policy, not $40,000.

As explained above, you may owe taxes.

The proceeds of a life settlement are almost certainly taxable. The assistance of a professional tax advisor should always be sought. The proceeds of a life settlement could also be subject to the claims of creditors. If the seller is within two years of death, other laws making the proceeds tax-free may apply.

lisa.org

A life settlement transfers ownership of your policy to another person or institution. This means your current beneficiaries lose the death benefit.

You should determine if there is a need to keep the life insurance policy to leave to your beneficiaries.

We recommend talking to the beneficiaries about the transaction. Including asking family members if they would like to assume the premium payments in future years on the policy.

One alternative to a life settlement is utilizing the accelerated death benefit (ADB) should your policy have one.

An accelerated death benefit allows you to take money from your policy, tax-free. It is deducted from the death benefit.

You do not need to pay back the money you withdraw. However, if you do not pay it back, your beneficiaries receive less upon your death. The amount they would receive would be the original death benefit minus the amount of the withdrawal.

There are tight restrictions on when you can use an ADB. In some cases, it can only be exercised if you are terminally ill and have a life expectancy of less than two years.

You may also be able to use the ADB if you are dealing with a chronic or serious illness.

Finally, you might be able to withdraw money from your death benefit if you have difficulty with everyday activities. The everyday activities included are eating, bathing, dressing, mobility, maintaining continence and toileting.

The situations that apply are stated in your policy. Your insurance company or broker can help determine if you qualify.

Should you wish to use your ADB, you still need to pay your premiums to keep the policy in force.

If you need cash, you could consider a loan against your policy. This is known as a death benefit or life insurance loan.

The interest on the loan varies by policy. You can choose when to pay it back. You also have the option of not paying it back at all.

Should you not pay it back, the loan amount plus interest is deducted from the death benefit. As a result, your beneficiaries receive less.

You might choose to surrender your policy instead of choosing a life settlement.

• it’s no longer needed
• you can’t afford the premiums
• you want to access its cash value
• you’ve found a better policy

When you surrender your policy, you lose the death benefit.

You may be charged a surrender fee. Surrender fees vary and the older your policy, the less you pay. Policies ten years or older may not incur any fees.

In exchange, you are given the policy’s cash surrender value. The cash surrender value is the equity in the policy plus interest or dividends minus any fees and loans.

The policy owner is the person who bought the policy. The policy owner may also be the insured but not always.

The insured is the person whose death triggers the death benefit. When the insured dies, the beneficiaries receive money from the policy.

Life settlement brokers facilitate the sale of a life insurance policy. They act on behalf of the policy owner. They are responsible for presenting policies to buyers for purchase.

Life settlement providers are the buyers of life insurance policies for sale.

The insurance company issued the policy.

Insurance companies accept premium payments in exchange for taking on risk.

Life insurance companies must legally pay the death benefit on an in-force policy when the insured passes away. This death benefit goes to the beneficiaries listed in the policy.