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Before You Let Your Life Insurance Lapse, Consider Selling It

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July 2005
Before You Let Your Life Insurance Lapse, Consider Selling It

Most people think that their life insurance policy has no value until they die. But a market is emerging for buying and selling existing life insurance policies. If you currently own term or universal life coverage that you no longer want or need, you may be able to sell your policy and realize some cash value from it. A life settlement transaction involves selling a current life insurance policy to a life settlement company, who then pays the premiums and is named as the beneficiary on the policy. When the policyholder dies, the company receives the payout from the insurance company.

Selling a current universal or term life insurance policy to a settlement company could be an effective strategy for raising cash immediately. The proceeds from the sale of a policy could be used to fund an immediate annuity that will provide monthly income for the rest of your life, or to pay premiums for long-term care insurance coverage (Income based on the claims paying ability of the insurance company). In cases where the insured is still healthy, the proceeds could also be used to purchase a paid-up single premium life insurance policy.���

Should you consider a life settlement? If you no longer need the coverage provided by your current life insurance policy, or you just don't want to pay the premiums anymore, a life settlement could help you realize more monetary value from your policy as opposed to surrendering the policy for the cash surrender value or, in the case of many term-policies, from letting your policy lapse and getting nothing out of it.

How much could you realize from the sale of your life insurance policy? Universal life policies can potentially be valued at three times or more the underlying cash value of the policy, according to the Viatical and Life Settlement Association. For term policies, the value of a life settlement transaction, in many cases falls between 10-30% of the policy's face value. In either case, actual results will vary, depending upon the insured's age, life expectancy, and policy face value.

What should you be aware of when considering a sale of a life insurance policy? Generally, you must be at least 65 years old, and the face value of your policy must be at least $200,000. It may not be a good idea to sell your policy if you know you will need the coverage to provide support to a surviving spouse or other dependents after your death. (Some settlement companies require that the current beneficiary endorse the sale of the policy.) Plus, once you arrive at an advanced age, you may find replacing your current policy either impossible or financially impractical.

Sources: September 21, 2004, The Wall Street Journal, Life Insurance for Sale?in a Secondary Market; October, 2004, The Nebraska Lawyer, The Secondary Market For Life Insurance: Tools For Estate Planning Practitioners

Another Way to Buy Long-Term Care Coverage

L

ong-term care insurance may be an important ? even necessary ? part of your financial plan. But you may be reluctant to buy a policy whose premiums can rise. Plus, if you never require long-term care, the money that you had spent on premiums simply vanishes.

Still, you may want the financial security that long-term care insurance provides. There is another way to get long-term care coverage ? by combining it with a life insurance or deferred annuity policy. These combination policies could make long-term care insurance more financially attractive.

Here's a brief summary about how they work: Long-term care insurance is added as a rider or as an additional benefit to a life insurance policy or deferred annuity contract. Premiums for many of the life/long-term care insurance combo policies are usually paid up front. While this can be a significant outlay of funds at the start of the policy, the one-time premium payment for both life and long-term care insurance does provide protection from rising long-term care insurance premiums down the road. In contrast to the life/long-term care policy, the long-term care coverage on a deferred annuity will typically be based upon a percentage of the annuity assets (based, among other things, upon the insured's age and health).���

One of the combinations of life and long-term care insurance provides current life insurance benefits to the policyholder if long-term care is required. The money to pay for long-term care expenses comes from reducing the policy's death benefit. So if you have a $500,000 death benefit and incur $70,000 in long-term care expenses, (the nationwide average cost of a year of nursing home care http://www.kiplinger.com/features/archives/2004/09/ltc.html ) the death benefit will decrease to $430,000.

As previously mentioned, another way that long-term care coverage can be combined with life insurance or a deferred annuity is to include long-term care insurance as a rider to the base policy. For example, a $100,000 life policy with a long-term care insurance rider may pay lifetime benefits up to $200,000. These policies typically require annual premiums for the long-term care coverage in addition to the initial premium payment. Many long-term care riders are guaranteed renewable. Assuming the insurer is financially sound, the annual premium on many policies remains constant throughout the life of the policy (subject to the insurer's claims-paying ability).

The insurance company will look at your family health history and any pre-existing conditions that you may have. In the case of a life/long-term care plan, the potential death benefit and long-term care expenses will be considered. Therefore, an annuity-based combination might be more appropriate if your health makes it difficult to buy life insurance. The money in the annuity can then be used for long-term care expenses or passed to a beneficiary.

Please note, however, that annuities are long-term investments designed for retirement purposes. Withdrawals of taxable amounts are subject to ordinary income tax and, if taken prior to age 59�, a 10% federal tax penalty may apply. Early withdrawals may be subject to surrender charges. Guarantees are backed by the claims-paying ability of the issuer.

Would a combination life/long-term care policy work for you? It depends on your individual needs and financial situation.

Moneywise is hosted by Rajesh Jyotishi with Shalin Financial Services, Inc.

An Investment Advisor Representative of FSC Securities corporation. A Registered Broker Dealer. Member of NASD/SIPC. For questions he can be reached at 770-451-1932, ext. 101


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