Life Insurance Experts

The new wrinkle in the life insurance industry poses some intriguing Issues:

• If the fair market value of a policy exceeds its cash value and the fair market value exceeds the policy owner’s tax basis in the policy, how is a sale taxed? Traditionally, when a policy is surrendered and the gross cash value exceeds the net premiums paid for the policy, the excess is taxed at ordinary income rates. Certain life settlement institutions suggest that the taxable difference between the settlement value and the cash value should be taxed at capital gain rates. Since there are currently no Treasury regulations on this issue, interested readers should seek tax counsel.
• A life insurance policy acquired on your life will become less valuable to the new owner the longer you live (and the longer that investor is paying premiums to maintain the policy). At least in theory and in the extreme, a third-party owner of a life settlement policy has an economic interest in an untimely death. As a result, life settlements are almost always purchased by institutional investment pools whose individual investors have no access to the identity of the insured’s under the acquired policies.
• Life settlements provide a new option for policy owners who are concerned that they cannot afford the revised premiums required by many policies that have not met their illustrated projections. Fair market value will generally exceed the policy’s cash value for those aged 65+ and in less than good health.
• Financial advisors should determine an assessment of fair market value for any client over the age of 65 for whom current insurance may require a substantial increase in premium or for which the death benefit is no longer needed.
• Because insurers are concerned about the total amount of life insurance outstanding on any given individual, a new policy may not be available. As a result, life settlements may not be suitable as part of an exchange for a new policy.
• Key person life insurance policies on departed executives may be especially good candidates for life settlements.