By Michael B. Dranoff, Director of Estate and Business Planning
New Jersey Life & Casualty Associates, LLC
Life Insurance: A Capital Asset
The largest asset many clients may own is frequently ignored. Like your house, business, retirement funds and other investments, a life insurance policy is an asset that has value.
Even though a life insurance policy is an asset that can be sold in the open market, many clients and their advisors don’t think of it this way. The result is when a client needs money for retirement, health care, long-term care or other expenses such as managing cash flow through the current COVID-19 crisis, a life insurance asset should not be overlooked.
The traditional view of life insurance is that it’s purchased for longer-term needs such as income planning or estate planning and when it’s no longer needed, it is lapsed, surrendered, or, sometimes, there is a reduction in the death benefit. However, there is a fourth option: a Life Settlement.
What is a Life Settlement?
A life insurance policy can be sold for more than its cash surrender value through a life settlement. A life settlement is the sale of a life insurance policy on the secondary market for more than the cash surrender value and less than the death benefit. The purchaser of the policy becomes the owner and beneficiary of the policy upon the death of the insured. Not every life insurance policy will qualify for a life settlement, but the ones that do can be sold for far more than their cash surrender value — sometimes as much as seven times the value.
Best Candidates for Life Settlements
Several factors make an insured a suitable candidate for a life settlement transaction:
- Age 65 or older
- One or more health issues
- Life Expectancy of less than 15 years
- Policy with a death benefit of $250,000 or more
- Premiums required to maintain the policy are less than 5% of face value
- Cash Surrender Value less than 15% of death benefit
The key component in determining the fair market value of a life settlement is life expectancy. The shorter the life expectancy, the more attractive a policy will be to a buyer. All in all, the insured’s current age, projected life expectancy and health conditions are critical factors in determining the market value of the policy. It’s important to emphasize that if an insured does not ideally meet these parameters, it does not mean that a life settlement cannot be an option.
When considering a life settlement, it’s important to consult a financial advisor who can assist with the process and determine if a life settlement is a good fit for your specific situation. Life settlements may not be suitable for everyone who no longer needs or who can no longer afford his or her policy, but for an individual interested in accessing optimal immediate cash value of a life insurance policy, a life settlement may be a viable solution – and far better than lapsing or surrendering a policy back to the insurance company.
You can reach Michael Dranoff directly at NJL&C, via telephone (973) 535-0955, ext. 124 or email: MikeD@NJLC.com.
BMK invites articles that may be of interest to our clients, colleagues, and friends during these trying times. BMK is not affiliated with New Jersey Life & Casualty, LLC and it does not endorse the content or views expressed by New Jersey Life & Casualty, LLC or by Mr. Dranoff. Should you have questions or comments concerning the article, we suggest that you contact Mr. Dranoff directly via the telephone number and email contact information provided.
The article is not and cannot be construed as legal advice.