Insurance can be tapped in times of need

The high cost of healthcare or reduced income, are just a couple of reasons seniors or terminally ill people may be experiencing a financial burden. Like most consumers, you’re likely to regard your whole life policy as a storehouse of wealth you can only hope to pass on to your family but never touch in a pinch.

Think again.

A burgeoning marketplace now allows policyholders to cash in whole life coverage in order to secure money for tough times.

It works like this: A consumer in need of cash can approach a provider—a licensed entity often backed with funds from a bank or institution—to purchase their policy for 20 cents on the dollar of its face value, on average. The investor takes over all premium payments on the policy and in exchange receives the full death benefit once the seller dies.

A somewhat similar option has been offered by insurance companies for several years through the inclusion of riders in whole life coverage. An advance or accelerated death benefit rider is an option for consumers diagnosed with a terminal illness or physical condition for which death is likely to occur within a specified amount of time, normally less than one year. In most cases, a policyholder can opt for provisions in their insurance policy allowing them to access a portion of their death benefits early, but he or she is not required to cash out entirely. Either way, there are options for you to ease a crisis—if necessary.

The Life Settlement Marketplace

In the life settlement market, an individual or family sells their coverage at a lump-sum price. Candidates for this option generally have a life expectancy of more than two years and can receive a payment greater than the surrender value—the money an insurance company will pay to the policyholder if his or her policy is voluntarily terminated before its maturity or the insured event occurs—offered by insurance companies. A viatical settlement is the sale of a life insurance policy by an individual of any age, who is considered terminally or chronically ill, to a third party in return for a percentage of the face amount of the policy which is typically much higher. Candidates for this option generally have a life expectancy of less than two years. In both instances, an investor or financial institution buys the policy and then assumes premium payments in return for a full share of the death benefit.

A Different Kind of Lifeline for Seniors

The business is growing. Between $5 billion and $10 billion in policies changed hands last year, as measured by face value—an indication that the investments in this market is now between $1 billion and $2 billion, annually, according to Doug Head, the executive director of the Life Insurance Settlement Association.

The reason settlements have become popular? Head and other observers point to lengthening life expectancy and the high cost of healthcare. In some cases, the expense of a chronic illness drives policyholders to consider using life insurance to foot the bill. A terminally ill patient might use a settlement to make his or her final months or days as comfortable as possible. Or, a retiree might tap a policy to bolster the savings they need to cover health or other expenditures over time, or to unload a policy they no longer find necessary.

Your Options

Keep in mind that you may be able to include a rider in your insurance contract that allows you the option to tap a portion of your death benefit early in the case of a terminal or chronic illness. Moreover, in the case of a debilitating illness, distributions up to $91,250 can be tax-free in accord with IRS regulations.

"In the event of an affliction such as diabetes or kidney failure, for instance, you have circumstances where advanced medical technologies allow us to live a longer life but at greater costs," says St. Louis-based financial planner Kathy Conley Jones whose firm, the Conley Financial Group, is affiliated with the Guardian Life Insurance Co. of America. "An accelerated benefit rider can provide a safety net beyond disability or long-term care insurance."

If you don't have an accelerated benefits rider or if you choose to liquidate your policy for other reasons, Head recommends that you approach a broker who can find several quotes for your policy from a variety of investors. "I'd say this is analogous to selling a house—you have a provider or financial institution which is your buyer and a broker who is there to make sure you get the best deal," says Head. While brokers' fees vary, Head says it is not uncommon for charges to run about 2% to 3% of the final transaction. In the case of a $500,000 policy selling for the 20% average of $100,000, a broker would pocket $10,000 to $15,000.

The LISA Website lists providers that purchase policies and brokers that can help you negotiate a transaction. Go to: www.lisassociation.org.

Once you have sold your policy, expect a third party to occasionally check in on you. Remember, an investor has picked up your policy and is awaiting your death benefit. The inquiries are discreet and kept to a minimum by rules adopted by most state insurance regulators, Head says.

_____________________________________________

By James A. Anderson

Copyright © 2006 Earl G. Graves, Ltd. All Rights Reserved.