A few weeks ago I sat down with a new client to discuss her financial affairs. What made this woman’s situation unique is that she has terminal cancer and according to her doctor, she only has at most about two years to live. Most of our meeting dealt with getting her financial house in order so that upon her death, things would be as easy as possible on her children. We discussed wills and trusts, beneficiary designations and other areas to make sure her financial house was in order. One issue we discussed was her life insurance policy.
Her life insurance policy has a death benefit of $500,000 and her annual premium is about $4,500. In addition, her policy does have some cash value, but not a lot. As we were discussing the insurance, she mentioned to me that her life insurance agent made an offer to her to buy her current policy. She says that he has offered her $150,000 to buy out the policy. Her question to me was whether I thought this is something she should pursue or not.
What the agent was proposing is what is known as a life settlement. Life settlements were popular a number of years ago but have fallen out of favor. The main reason they’ve fallen out of favor is the fact that so many people have been ripped off. Life settlements are basically where an investor buys someone’s life insurance policy during that person’s lifetime. The insured then has the proceeds to do as they wish. The investor would then own the policy and is responsible to make the premium payments. Upon death of the insured the investor would receive the face value of the policy.
The theory behind life settlements is that it allows someone to enjoy some of the proceeds of their life insurance policy during their lifetime. This could be particularly valuable for someone who needs the proceeds to increase the quality of their life.
Many people have life insurance policies that they don’t need and no longer want to pay the premium. Therefore, in those situations selling your life insurance policy to an investor may make sense. After all, if you don’t need the policy and you can make money selling it, why not. However, the problem develops like in the case at hand. In the case at hand, as I told my client, I thought her life insurance agent was taking advantage of the situation and that his offer to purchase the policy was unrealistically low. Therefore, based on the fact that the client did not need the money from the life insurance policy and considering her health issues, I recommended that she reject the offer.
All too often many people that are involved with life settlements are looking at taking advantage of a senior citizen. Therefore, if you are considering a life settlement and selling your policy, you have to proceed with caution. Before you accept an offer you also need to consider other alternatives. Particularly, as in the case at hand where there is a terminal illness and life expectancy is so short; there can be other viable alternatives that are much better from a financial standpoint.
Good luck!
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.