ColumnistsLong-term Care

An Unexpected Pot of Gold!

Life settlement is becoming a popular estate and long-term care planning strategy

By Susan Suben

pot of goldWhat would you do if you found out you had thousands of dollars available to you that you never knew about? Buy a new car? Take your grandkids on a trip to Disney? Pay off your mortgage?

Would you be surprised if I told you that all of these wishes could come true?

The life insurance policy that you have been paying premiums on all these years, and perhaps no longer need, can bring you money while you’re still alive to give you a better quality of life, more enjoyment and peace of mind.

You can sell your life insurance policy to a third party for a sum greater than the cash value, the amount you would receive if you canceled the policy, but less than the death benefit. This third party will become the owner of your policy, continue to pay your premiums and collect the death benefit when you die. This is known as a life settlement, which is becoming a popular estate and long-term care planning strategy as individuals live longer and need access to more income for living expenses or funds to pay for home care or nursing home care.

The life settlement carriers usually purchase policies from individuals over the age of 65 who have a permanent (universal or whole life policy) or convertible term policy with a minimal face value (death benefit) of $100,000.

When you first bought your life insurance policy you were probably healthy and young. The life settlement companies are generally looking for clients who are older and not as healthy. They would ideally like to pay premiums on your policy for 10 years or a bit longer.

The value of your policy is determined by the cost to the life settlement provider to keep your policy in force based upon your life expectancy. An actual mathematical analysis is used to help the provider determine what their return would be if they purchase your policy. Typically, you can expect to receive up to 30 percent of the death benefit.

The life settlement industry was under-regulated for quite some time which made individuals and their attorneys/financial advisers shy away from this type of planning strategy. Today, many life settlement agents are life insurance agents so they have a better understanding of life policies, and life settlement providers must adhere to state regulations and provide consumer disclosures. Providers are required to tell consumers about tax risks and alternative solutions to a life settlement. They must also disclose how an agent or broker is compensated. However, even with all of these regulations, it is still extremely important to work with a reputable company and read through your agreement. Life settlements remain a complicated transaction and should be entered into fully educated.

The transaction process takes about four months and consists of an application, document disclosure (your medical records; an illustration on the policy you would like to sell) and life expectancy reports. Once this information is reviewed, an offer will be made to you that you can choose to accept or not. You would be under no obligation. If you do accept, a closing packet will be sent to you that will contain a change of ownership, the actual contract and other documentation. Once this packet has been executed, the funds from your life policy will be transferred to you.

Note that any proceeds from your life insurance policy are income tax free up to the cost basis. Life settlement funds are taxable if they exceed the sum of all premiums paid into the policy.

There are pros and cons to every retirement planning strategy. If you no longer need your policy, want to supplement your retirement income, repair your home, take a trip, set up college savings accounts for your grandkids, pay off your mortgage, or have a nest egg for long-term care, selling your life insurance policy might be a very worthwhile transaction to do.

If you are planning to apply for Medicaid or if selling your life insurance policy would have negative tax consequences, it may be wise to forgo this planning strategy and keep your policy so that your beneficiaries receive the death benefit tax-free.

Think about this. If you no longer need your policy to pay off debt and you are not concerned about leaving the death benefit to your heirs, why not profit from your policy while you are still alive? With a life settlement you can have some return on your policy now in order to have extra funds to do the things you want to do, and feel more financially secure about your future.

Susan Suben, a certified senior adviser, is president of Long Term Care Associates, Inc. and Elder Care Planning. She is a consultant for Canandaigua National Bank & Trust Company and can be reached at 800-422-2655 or by email at