Life insurance is something that many people don’t prioritize until it’s almost too late. We get busy with the demands of adult life–career, jobs, family–and then something happens to make us question our longevity. It may be time to sign up for life insurance.
While most of us might think term life insurance is the best option, life insurance is something that should be thoroughly investigated to make sure you are getting the most bang for your buck. There are many options available, and spending some time to understand the differences between insurance types will help you choose wisely in this decision that will not only affect you, but your whole family. Here are some types of insurance, with the features of each:
The Two Main Types of Life Insurance: Term Vs. Permanent
We may be familiar with these types of life insurance, but there are several sub-sects within each category that offer different benefits to the policy owner. Before we cover the intricacies of these policies, let’s get an overview of term vs. permanent and what they mean for you:
Term Life Insurance
Term life insurance is considered the most basic type of life insurance policy, because it awards benefits only upon the death of the policyholder. There is no build up of cash value, and after the initial term that is agreed upon when the policy is created, the policy ends. Contract length can run anywhere from 15 to 30 years, with some of the better companies offering a 1-year renewable contract option beyond the initial term. The terms of the contract and the premiums stay the same for the life of the contract. This makes it difficult for the policyholder to request additional coverage when the initial term ends, as they would have to re-qualify for coverage at an older age, with possibly a more questionable health status. In some cases it is possible to convert a term life policy over to a more permanent form of coverage.
Permanent Life Insurance
Permanent life insurance is a policy that remains in effect as long as the policyholder is still alive, and it retains cash value and in some cases, even appreciates in value. While premiums may be a bit higher, there is additional security in realizing that this type of coverage will not, like term life insurance, eventually cease to exist.
The Different Types Of Permanent Coverage
Whole life coverage is the simplest form of permanent coverage, for it allows those who are budget conscious to stick to a premium that remains the same for the life of the policy. There are advantages to beginning a whole life contract at a young age, since lower premiums remain in effect as the policyholder continues to advance in age and possibly developing some adverse health conditions.
Universal life coverage has some of the same benefits of whole life; death benefits are guaranteed pending the death of the policyholder, and the policy steadily grows in value, providing additional security upon maturation. One additional benefit of universal and whole life policies is that they can be borrowed against to pay down debt, to refinance, or to make large purchases, although this is not a practice that most financial advisors would condone.
Variable coverage grows in ways similar to whole life and universal coverage, but the policyholder has the option of taking a portion of his account and investing it in equities that have the potential to grow much larger than a life insurance policy normally would. This could potentially make cash payout at the end of the policy much greater. If you an individual that would be okay with a certain amount of risk to acquire growth, this might be the policy for you.
Survivorship coverage exists for families where it is necessary to insure more than one person. This type of coverage is generally less expensive than holding two life insurance policies. Some policies pay out upon the death of the first family member, while others grow in cash value until the death of the last surviving policyholder. These types of policies are ideal for people looking to maximize their cash growth while minimizing their out-of-pocket costs.
Final expense coverage is typically purchased by seniors ages 50 and above who do not want the burden of their funeral and burial expenses taken on by their survivors. With the average cost of a funeral estimated at about $10,000 today, final expense coverage is a welcome benefit to families already experiencing grief and loss.
No medical exam coverage is a benefit to people with pre-existing conditions that may not be covered by an insurance provider. While this is beneficial to those people, the coverage comes with higher premiums and lower overall benefits than policies offered to people willing to undergo medical exams.
Thanks to the wide variety of options, almost everyone can get the life insurance coverage they need at a price they can afford. Ultimately you will need to determine the best choice for your needs, but knowing a bit more about what is out there will allow you to make an informed decision. There is tremendous peace of mind that comes with knowing you’ve made the right decision for you and your loved ones.
November 27, 2018Magna Life Settlements
Am I eligible for a viatical settlement?
You may be eligible for a viatical settlement if you have an in-force life insurance policy that you’re willing to sell in exchange for a one-time payment. There are companies that specialize in buying life insurance policies from individuals who longer need or want their policies. In such an arrangement, the viatical company becomes the owner and beneficiary of the policy, and the buyer becomes responsible for premium payments. After the sale of the policy, the original owner no longer has any obligations or claims relating to the policy. Once the insured person dies, the viatical company collects the death benefit.
Does a viatical settlement make sense?
A viatical settlement does not make sense for everyone, but for individuals in certain situations, it could provide a much-needed infusion of cash to help with medical or other expenses. If you have a life insurance policy that you’re sure your beneficiaries will not need to rely on, and you are in need of a lump sum of money, a viatical settlement might be suitable. It’s important to understand that the amount you receive in exchange for your life insurance policy can be significantly less than the policy’s death benefit. You’ll also want to discuss any potential tax implications with your tax advisor.
How is my payout determined?
Under a viatical settlement, your payout is determined by the amount of the policy’s death benefit and your expected lifespan. Generally, the longer you are expected to live, the lower your payout will be. This is because the viatical company will have a longer period during which they will make premium payments on the policy – reducing their profitability. You may be required to have a medical examination in order for the viatical company to estimate your expected lifespan.
Choosing an Accelerated Death Benefit or a Viatical Settlement
Some life insurance policies have an accelerated death benefit, which allows the insured person to receive part of the policy’s death benefit while they are still living. Eligibility is usually reserved for situations where the insured person is suffering from a terminal illness. If you’re in this situation, an accelerated death benefit may be optimal, because you are able to retain ownership of the policy while receiving financial assistance. If your policy does not have an accelerated death benefit, or if it does include one and you’re not eligible to activate it, a viatical settlement may be a better option.
As the life settlement market increases in visibility, more and more seniors are learning that a settlement can be a profitable way to get a cash benefit from a life insurance policy. The key to making a decision concerning life insurance options, however, is understanding who is eligible for a life settlement and who is not. While a financial advisor or insurance agent can provide guidance, individuals interested in a life settlement can determine their own eligibility with accurate information.
Consider the following parameters to determine if a life settlement might be a good choice for you, and then enter your specific details into our life settlement calculator for a specific estimate of the payout you could receive.
So, Who Qualifies for a Life Settlement?
In the majority of cases, an individual must be over 65 to qualify for a life settlement, although younger people might enter into settlements if they have certain medical conditions.
Because life settlements are the most lucrative for individuals whose health is more impaired than predicted at the time the policy was issued, those who are less healthy are more likely to benefit from a settlement.
Type of Insurance
Universal Life, Survivorship Universal Life, Convertible Term Life, and Whole Life policies can all qualify for life settlements if the policy holder meets other conditions.
If the death benefit, or face amount, of a policy exceeds $100,000, that policy can be sold in a life settlement.
Illustrated premiums should be less than five percent of the policy’s face amount.
Date of Issue
A policy must have been active for more than 25 months to be eligible for a life settlement, but some states require that a policy be in force for up to five years. For more about the regulation of life settlements in various states, consult the Life Insurance Settlement Association resource here.
Type of Ownership
Policies owned by virtually any type of entity can be sold in a settlement—individual, corporate, foundation, business, trust or non-profit organization.
For a policy to qualify for a life settlement, it must have been issued by a U.S.-based carrier with an A.M. Best Rating of B++ or better.
July 03, 2018Magna Life Settlements
3 Reasons Agents Should Inform Clients About Life Settlements
What agents don’t know can hurt the financial future of life insurance policy owners. About half of all agents are uninformed about the benefits of life settlements, which is the sale of a life insurance policy for cash to an investor. Because of this disconnect seniors are missing valuable financial opportunities.
Take the case of a 71-year-old policy owner with a $1 million, 20-year term life insurance policy. His policy was about to expire, with a prohibitive rise in premiums from $5,000 to more than $220,000. He lapsed his policy because his agent didn’t inform him about life settlements, which could have converted his term policy to a permanent Universal Life product with a much lower annual premium of $28,000 and also paid him $200,000 for his policy.
According to the ICR Life Insurance Study, 79 percent of clients feel agents should inform them about life settlements. More than half a million U.S. seniors lapse their policies annually, and only 1,250 take advantage of a life settlement, meaning that only one in 400 people benefit from life settlements. The key to increasing that percentage is making sure seniors are well informed about their options. Life settlements are living benefits, or assets that help seniors while they are still alive. Yet despite their potential benefits, they are often overlooked by agents and, by extension, their clients.
There are three reasons agents should inform policy owners about life settlements:
Living Benefits Can Be an Effective Selling Tool
Insurance agents often hear the question, “What happens if I don’t need life insurance in the future?” Changes are inevitable over the years, sometimes altering a person’s reasons for purchasing life insurance in the first place. When clients buy life insurance, they should know that their investment has potential future resale. A living benefit today often outweighs the need to collect a death benefit tomorrow. A life settlement can put money back into the pockets of seniors who qualify.
Regulations Are Beginning to Require Disclosure
In an effort to protect seniors, more states are implementing consumer disclosure requirements when a senior wants to make a policy change. States are beginning to require insurance carriers inform policy owners that they should consult with a licensed insurance or financial advisor to learn about alternatives to lapsing a life insurance policy–options like selling the policy for a life settlement, gifting the policy to someone else as a charitable contribution, or converting it to a long-term care policy. These disclosure acts are in place in eight states and pending in two.
Living Benefits are a Win-Win-Win
Spreading the knowledge of life insurance options benefits agents, investors and, most importantly, policy owners. Agents may be eligible to receive compensation from life settlement providers. Investors benefit from purchasing the policy and collecting the face value when the policy matures. And policy owners win by getting rid of annual premiums and receiving the highest possible payout for their life insurance policy.
If you need help determining if a client qualifies for a life settlement, explore our life settlement calculator or simply reach out for a personalized life insurance valuation. Magna Life Settlements can help you determine if a client’s life insurance policy qualifies for a life settlement.
Rhode Island: One Step Closer to Requiring Life Settlement Disclosure
Knowledge is power for seniors focused on the optimal management of their finances, and a recent movement of state disclosure laws will increase consumer understanding of their life settlement options.
Studies show that consumers who sell their life insurance policies receive four to seven times more money than they would receive from surrendering policies, yet the Life Insurance Settlement Association reports that 90 percent of policies are allowed to lapse without any benefit going to the holder or beneficiary. One contributing factor in this situation is the tendency for some life insurance carriers to stay quiet about the rights of their policy holders.
With an eye on their bottom line, some insurance carriers go to great lengths to keep life settlement information out of their customers’ hands, even penalizing insurance agents who disclose the full menu of options to their clients. But this industry “gag order” is being removed, one state at a time, by lawmakers advocating for their constituents’ right to information.
On May 23, Rhode Island came a step closer to becoming the ninth state to require consumer disclosure of life settlement options when its bill passed the House of Representatives Corporations Committee. The law, which requires insurance companies to notify policy holders older than 60 who have chronic or terminal illnesses that they have the option of selling their life insurance policy, will take effect on October 1 if passed by the full legislature.
Kentucky, Maine, Georgia, Florida, New Hampshire, Oregon, Washington, and Wisconsin have all passed similar consumer-disclosure laws since 2016, and a bill has been introduced in Texas. Several lawsuits have also been filed by individuals against their insurers in an effort to hold life insurance carriers accountable for their failure to give policy holders full access to information about their life insurance.
A class action lawsuit filed against Lincoln Financial in California, which was settled before reaching summary judgment, alleged that Lincoln Financial engaged in a “common and systemic practice” of “failing to inform and/or concealing from its insureds the option of a life settlement in connection with their life insurance policies.” According to the filing, Lincoln “purposely omits this information from Plaintiffs and Class members because it knows that other options, such as surrendering the policy (in whole or in part) or letting it lapse, will generate greater profits to Defendant than a life settlement would.”
February 24, 2018Magna Life Settlements
How are life settlements taxed?
How are Life Settlements Taxed? Learn more with the Magna Life Settlements, Life Settlement Tax Guide today!
Recent landmark cases have brought many Life Settlement tax issues to light as the IRS itself has had issue with defining how life settlements are handled. Below you will find a brief guide covering how Life Settlements are taxed.
What is a life settlement?
A life settlement is a life insurance policy that is no longer needed. When the owner of the policy decides that they no longer want the policy, they have two options available to them. They can let the policy lapse altogether or they can choose to surrender the policy. The life settlement option presents an opportunity to sell the policy to an investor. The policy is generally sold to another party. These policies don’t involve terminally ill patients.
How do life settlements work?
There are actually life settlement companies that acquire these policies. They hold them until they reach the maturity stage, and then the net value of death benefits is collected. If the policy’s benefits aren’t collected, they can be sold to investors. The owner collects a lump sum payment as a part of the transaction. The amount received depends on your age and other conditions in the marketplace, but you usually end up with more than the cash surrender value. You won’t be able to collect the full death benefit amount.
What are the buyer requirements?
The buyer of your policy will take over the premiums for the remainder of your life. They will also pay you a lump sum at the time of the sales transaction. When you die, the death benefit is collected by the buyer of your insurance policy.
How life settlements are taxed?
The proceeds are treated as ordinary income. Whatever the net proceeds from the transaction is valued will be taxed as ordinary income. The amount paid into the premiums will be treated as capital gains. The remaining net proceeds after taxes from surrendering the policy after should be compared to after-tax proceeds received by surrendering the policy to determine if it makes sense to sell the policy.
In theory, the additional proceeds following a life settlement should cover any tax obligations. It is best to speak to a tax advisor prior to making any serious decisions regarding a life settlement. If the policy is not sold for a higher rate, the seller can lose by having to cash out for a lower sum of money.
Magna Life Settlements, Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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