There has been a recent clampdown in places such as Oklahoma on the unscrupulous practices of buyers and intermediaries of life policies sold by seniors; there have been numerous instances where $1million policies have sold for as little as $35,000.
Despite this there is, according to Kim Holland, the insurance commissioner of Oklahoma “a legitimate purpose in viaticals and life settlements.” The sale of a policy whereby the seller is not expected to live more than two years is known as a Viatical and these payments are not subject to income taxes. Life settlements on the other hand are made on policies surrendered where the owner has a longer life expectancy, and are subject to taxation.
Jonathan Pond, a financial advisor from Newton, Massachusetts agrees that cashing in a life insurance policy sometimes makes sense and states “If you really need the cash then it’s certainly worthwhile to consider”.
Substantial number of Seniors Seek to Cash in Life Policies
The trade in selling viatical policies emerged in the 80’s as individuals with AIDs, for whom death suddenly loomed large cashed in their policies to get quick access to finance either because they had lost their jobs or had to pay huge medical bills. Since then another group of people have taken their place – people approaching their seventies who wish to surrender or sell their life insurance policies for reasons such as needing money for long term health care, for vacations or just cash to make ends meet. Alternatively, some older people find that they have amply provided for themselves and their spouse via other investments and have no need of the policy any longer.
Seek Financial Advice before Cashing in a Life Policy
Although Jonathan Pond believes that cashing in a life policy can be a valid way of raising money he urges his clients to try other routes first. Typical life policies will reserve some of their value as a death benefit even after it has been surrendered. And the policy owner may be disappointed with the amount after tax is applied. The amount they get depends on a number of factors, including their age, sex, health, and life expectancy, the type of policy it is, and the cash value of the policy.
Those selling Life Insurance Policies should shop around
Gloria Grening Volk has written a book entitled “Cash for the Final Days” (Bialkin Books 1997) and she says selling a policy should be looked upon in the same way as selling a house – “Don’t go with the first one that makes you an offer.” Matthew J Gaul, deputy superintendant for life insurance at the New York State Insurance Department agrees that sales were “something where consumers really need to price comparison shop among different providers.”
Source: Charles Delafuente “When Life Insurance is More Valuable as Cash”, NY Times Mar 3 2010
photo credit: Hakan Dahlstrom