Over Your Dead Body: Should You Sell Your Life Insurance Policy?
Author: Patrick J. Kiger
AARP Bulletin Today
Stay away from STOLI deals, advises Frank N. Darras, a lawyer in Ontario, Calif., and an expert on insurance issues. These “stranger-originated life insurance” deals, in which investors ask older people to take out policies, are rife with financial and legal complications, he says.
But what about life settlements, which are a legal way of reselling life insurance because the insured individuals originally bought the policies themselves without the intention of reselling them?
Darras advises lots of caution.
“When you’re in your 20s, you have life insurance agents telling you that you absolutely need insurance,” Darras says. “These are the same people who are now knocking at Grandma’s door, saying that she doesn’t need insurance anymore and that she’ll benefit from selling her policy to them at a deep, deep discount.”
Selling a policy and investing the proceeds generally won’t yield as much as the death benefit that the policy will pay, according to a 2005 study by Deloitte Consulting. But there are four scenarios in which a life settlement might make sense, Darras says:
• You have a catastrophic illness, expect to live two years or less and need money to pay expenses in the interim.
• You’re in dire financial shape, and the insurance policy is your only remaining asset that can be cashed in.
• You can no longer afford the premiums and otherwise would simply let the policy lapse.
• You get “a truly terrific deal” that gives you significantly more than the surrender value of the policy.
Get any offers in writing, Darras suggests, and ask that the agent’s or broker’s commission be disclosed. (Commissions can be as much as 8 percent of a policy’s face value, the Deloitte study found.)
With a life settlement, as with a STOLI, you may have to pay higher income taxes, Darras warns. In addition, your eligibility for Medicare or Medicaid may be affected.