Can Insurance Companies Provide a Life Settlement Option?
For over two decades, many life insurance companies discouraged the use of life settlements. Some organizations even went so far as to forbid their agents from seeking a life settlement for their clients. However, some of the biggest life insurance companies are now offering some policy owners increased cash surrender values, which mimics the advantages of a life settlement. They attempt to encourage individuals to surrender their policies.
These offers are a substitute for a life settlement. Some states believe that this practice is illegal under current insurance regulations because it is an unlicensed life settlement or a breach of the Standard Nonforfeiture Laws. Another problem is that this practice may be discriminatory due to insurance companies treating some policyholders differently compared to others.
What is a Life Settlement?
A life settlement is simply selling your insurance policy to a third party to receive a cash payment. The payment for a life settlement contract is greater than the surrender value, but it's not as much as the actual death benefit. Once the sale is complete, the purchaser will make payments on its premiums and become the beneficiary on the policy. This process allows the purchaser to receive the death benefit once the insured dies.
Life Insurance Companies vs. Life Settlement Companies
Life insurance companies further validated the founding principle of the life settlement industry, which is that a life insurance policy can often be worth a lot more than its cash surrender value. Which begs the question, why would life insurance companies make these offers to policyholders?
One of the biggest motivations behind these offers is that insurance companies are trying to reduce their losses on policies that were either underwritten or priced too aggressively. Finding a way to get these policies off the books is a top priority, even if it does cost the insurer extra money, as it will most likely save them money in the long term compared to keeping the policy. Many insurance agents are being asked to advise their clients about these offers, as insurers feel that these policies are too great of a deal for consumers.
Why Insurance Companies are Increasing Cash Surrender Values
In other words, a life insurance policy that's priced too low is not profitable enough to keep on the books for life insurance companies. Ultimately, this creates a big motivation for insurers to provide additional incentives for clients to surrender the policy.
The enhanced cash surrender value provides immediate gratification, but the biggest concern is whether insurance coverage is required. For example, the higher cash surrender value will often be much less than a death benefit. In addition, the surrender proceeds would be subject to income taxes if there is a profit.
Other Options to Consider
A policy replacement may also be an option for healthy policy owners that qualify for new coverage. However, doing this may not always be financially viable due to the favorable pricing of their existing policy and the likely higher expense of the replacement policy, even if it's offset with an enhanced cash value.
On the other hand, a life settlement instead of an enhanced cash surrender value needs to be considered for policyholders that no longer need their coverage, especially if they have any health issues. The life settlement offer can often be much greater than the enhanced cash surrender value.
Working with life settlement advisors is always a wise choice to help you determine the best options to meet your needs. Exploring all of the different possibilities is especially critical if you receive one of these offers or think about surrendering your life insurance policy. Comparing your other life insurance settlement options will help you decide what is in your best interests.