Have you decided that you no longer need your seven-digit life
insurance policy, and would you like to receive significant cash
for it? A new industry has emerged mainly involving hedge
funds, investment speculators and large investors who acquire life
insurance policies with the hope of collecting hefty policy payoffs
upon the insured’s demise.
The price at which investors may be willing to acquire your policy
is a combination of your age (life expectancy), the face value of
the policy, the strength of the life insurance company, and the
future premiums that are actuarially projected to your estimated
year of death. Where the insured’s health is an issue and where
the insureds are advanced in age, these factors may lead to a sale
price significantly more than the cash surrender value of your
policy. You will have to report a capital gain on the sale of your
life insurance policy. People typically decide to sell a life insurance
policy either when it is no longer needed in the context of their
estate plan or when the cost of maintaining the policy exceeds
their financial means.
LIFE INSURANCE TRUSTS
In some cases where insureds have multiple policies, it may be
possible to sell one or more policies and use the sale proceeds to
cover future life insurance premiums on the retained policies.
Where multiple life insurance trusts are involved, it may be
possible to merge one or more trusts together to combine policy
sales proceeds with retained policies so that the future policy
premiums can be paid by the trust on a gift-tax-free basis. The
market for purchasing life insurance policies has somewhat
contracted in the near term due to credit conditions and increased
scrutiny by Congress and the SEC. However, unless we see
legislation significantly regulating this industry, it is unlikely that it
will disappear in the near future.
CAUTION
It is important to deal with a reputable insurance broker in this
area who is knowledgeable with the market. Many states do not
require brokers to disclose their broker’s commission on these
transactions. However, there is no reason why the broker you
select cannot voluntarily disclose this arrangement up front.