Coverage to Cash: The Truth Behind “Senior Settlements”

Promising fast cash for life insurance policies, senior settlements (or as they’re technically called, life settlements) are increasingly popular with seniors needing a payout.

Life settlement companies are a new breed of business, snapping up seniors’ life insurance policies and investing them for a profit. After paying a percentage of the policy’s worth to the senior, the company becomes the new owner. They take over the monthly payments and get the full pay out when the senior eventually dies.

What do seniors get?

The value of a life insurance policy is determined by several factors: the life expectancy of the policyholder, overall health, the amount of the policy, age, etc. Depending on these factors, seniors 65 and up can stand to make more money selling their unwanted policy than canceling it with the life insurance company.

Sounds good to seniors who can put that cash to good use now.

For some premiums have become unaffordable post-retirement; others want to invest in more practical insurance, such as long term care; some need cash to pay for living expenses or they want to donate to charity, or give a gift to a loved one.

But it’s not all roses: here are 6 ways a life settlement can seriously trip you up:

1. That extra income can make you ineligible for Medicaid and similar government programs.
2. If you are at-risk for bankruptcy or in credit trouble, the cash from a settlement could be collected by creditors.
3. The life settlement company, not the original beneficiaries, will get the death benefit when you die. The pay out you get now from a life settlement will be a lot less than what your family would receive.
4. The settlement is NOT tax-free, meaning if you’re financially vulnerable you could get slapped at tax time.
5. If the cash from your life settlement is all dried up when you die, the burden of your final costs falls entirely on your family.
6. You’ll have to give your medical information to a life settlement company. The company may hand your information to others, or even sell your policy to someone else, putting your personal privacy at risk.

Senior settlement scams

The life settlement market is a billion dollar business and not all transactions are ethical.

If you’re approached by someone who pressures you to sell your existing policy, promising you’ll be able to buy a replacement, be careful. Because you’re older than when you purchased your original policy, you might not qualify for the lower rates or benefits you once did.

Be careful if a representative from an investment company urges you to purchase a life insurance policy with the intent of quickly selling it back to the company. These “wet paper” transactions often lead you to misrepresent the facts during the application process. And taking any part in this kind of deal could make you guilty of fraud!

If you are thinking of selling…

• Consider the alternatives. Talk to a financial adviser to determine if a life settlement is right for you.
• Shop life settlement companies. Make sure a life settlement company is licensed to do business in your state, and get the value of your policy estimated by several companies.
• Check with your state. Find out how life settlements are regulated by your state before you start applying.