Does It Make Sense to Sell a Sizable Life Insurance Death Benefit For Cash?

One of the most important decisions about any investment asset is the end game – how it will be sold or passed on. People don’t always think of life insurance as an investment or an asset, but during this tough economy, there’s much more talk of various transactions that will turn life insurance into cash. In some cases, these options are good ideas. But it’s important to get advice first.



At one point, the buzzword was “viatical settlements,” a practice of selling one’s active life insurance policy to a company that would pay the insured the estimated present value of the death benefit so uninsured healthcare costs and related expenses could be paid. Such settlements grew in popularity during the 1980s AIDS crisis, when insured individuals, mostly young men at the time, desperately needed funds for what was at the time an almost guaranteed immediate death sentence. That business eventually attracted some unscrupulous dealers.


Yet these policy sales opportunities remain for seniors, either as viatical settlements, if the holder is not expected to live for more than two years, or as a “life settlement” that essentially sells the policy to an investor in exchange for a cash amount. A financial advisor or a tax advisor should be consulted first to determine the tax treatment for either transaction – generally, viatical settlements are not subject to income tax but life settlements are.


A life settlement is usually made through settlement brokers to investment companies for amounts that potentially could be far greater than their surrender value to the insurance company. The amount a policyholder could get depends on such factors as age, gender, overall health, actuarial factors like life expectancy and whatever cash value the policy has. The buyer typically takes over the payments on the policy if more payments are due.


A financial planning professional can be a first step in getting you the advice you need on whether to accept any offer to buy an insurance policy. Here are some steps to consider:


Is there any other source for the cash you need? Life insurance has a purpose. It is there to protect your family’s assets in case you die. Elderly policyholders may have other alternatives like home equity loans or to tap the loan value on the life insurance policy, which would leave the coverage in force. It’s important to check with a CFP® professional to weigh the pros and cons of borrowing against any life insurance policy and it’s particularly important to see if the rate the insurer charges is lower than the insured may be paying on other debts.

Is it legal to sell a life insurance policy to a settlement broker in your state? Unscrupulous players are forcing more scrutiny on the life settlement business in various states and Congress as well. A call to your state insurance commissioner might be a good idea as you start your investigation. Keep in mind that the life settlements business is controversial and there may be efforts underway in your state to scrutinize these transactions, which could slow or stop your plans.


What impact will such a settlement have on your taxes? Depending on the laws in your state and your own circumstances, you might end up paying considerable taxes on the gain. Check with a reliable tax expert first.


What about your heirs? Will they need the death benefit? It’s worth talking to family about such a move.


Will your settlement be higher than the surrender value of the policy? In some cases, it can be significantly lower.


What effect will this decision have on the rest of your estate? Granted, most people who attempt such a decision may have exhausted other assets, but it’s important to do a full review of one’s finances to see how a life settlement decision may weigh against other financial realities.


April 2010 — This column is provided by the Financial Planning Association® (FPA®) of Puget Sound, the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Puget Sound if you use this column in whole or in part.

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