Q. Can you comment on cashing in a universal life policy or selling it to an investor?
A. People may consider cashing in their life insurance policies for many reasons. For example, in these challenging economic times there may be a need for cash to meet expenses, or there may be a change in the needs of dependents. Selling to an investor may or may not be the right choice for you. I asked Rolf Junge, rates and forms analyst here at the Insurance Division with a wealth of experience in life insurance to respond to your specific questions. Here are his thoughts:
You have started to ask the critical questions in determining if a life settlement contract is most beneficial to you.
First of all, you ought to know that there are other possible alternatives to life settlement contracts. One such alternative is an Accelerated Death Benefit that pays you a percentage or all of the expected death benefit (face amount) while you are living. You may not qualify for this option according to the agreement in the policy or rider. For example: the policy/rider may say that you must be declared terminal with 24 months or less to live as determined by a physician.
Secondly, there is a possibility of your taking a loan if your policy has cash value. The amount of the loan is backed by the cash value in the policy not the face amount. If you die with a loan on the policy the loan is deducted from your death benefit before your beneficiary receives the remaining amount. Keep in mind that you will want to keep your policy from lapsing. Otherwise the policy ends and there may be tax consequences. Interest is charged on the loan amount, and there may be fees involved.
Third, you may want to just take a withdrawal of money from the cash value. There may be fees involved, and you should be sure to ask how the withdrawal may affect the policy in the future.
Finally there is the option of what is called a life settlement contract. A provider/broker makes an offer to purchase your life policy for a particular cash amount. The amount is determined by various criteria such as your age, sex, the age of your contract, the value of your contract, premium payments, and your health.
Each of these actions may have tax consequences. They may affect your eligibility for some government programs: food stamps, Social Security, and Medicaid to mention a few. Your ability to purchase future insurance may be limited, particularly if you have health issues.
Therefore, it is very important to consult professionals in appropriate agencies, insurance providers, financial advisors and tax accountants.