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Selling your life insurance policy

Selling your life insurance has an understandable appeal, particularly if you're very ill and need cash right away. You may get anywhere from 50 percent to 80 percent of the face amount of your policy, depending on your health. But, if you're considering this option, keep in mind the reasons you bought the policy in the first place.

Keep in mind viatical companies will be very interested in your health once you've sold your policy.

A viatical company thinking about buying your life insurance policy will demand complete access to your medical records, especially if you're not healthy. The profit on this transaction for the investor rides on the estimate of how long you will live after selling your life insurance policy. You can be sure that people you don't even know will be very interested in your medical prognoses and deterioration. A viatical company will track your progress by means of phone calls, postcards, or some other pre-established communication. The process is not always confidential, so anyone, including your creditors, may be privy to your transaction.

If you are approached about selling your life insurance, follow these guidelines:

  • Call your state insurance department to find out what, if any, licensing or regulations are in place for viatical companies. Some states require viatical companies and/or their brokers to be licensed.
  • Consult your attorney, accountant, or financial planner. Find out the tax ramifications of viaticals; some states allow you to receive your proceeds tax-free. Check on the impact on probate and estate settlements. The Health Insurance Portability and Accountability Act says that viatical settlements, in which the recipient is terminally ill, are not subject to federal income taxes. However, life settlements that involve people who are not terminally ill or who are completely healthy are taxed as ordinary income to the extent that the sale price exceeds the policyowner's investment in the contract, i.e., his or her aggregate premiums. These sellers don't even enjoy the lower capital gains rates.
  • Contact several viatical companies to make sure the offer is competitive. A company may pay 60 percent of the face value to a person with a life expectancy of two years or less, or 80 percent to someone whose life expectancy is less than six months. The Viatical Association of America encourages potential "viators" (policy sellers) to get three offers on a viatical settlement before selling.
  • Request that the company immediately set up an escrow account for you when you accept the settlement, so you'll be assured the funds will be there to cover the offer. Any reputable viatical firm would do this anyway. If they balk, you're dealing with a disreputable company.
  • Talk with your current life insurance beneficiary, who is likely to be a family member or a close friend. Your decision will affect the beneficiary's life and could make a big difference if he or she is saddled with your medical bills when you die.
  • Keep in mind that receiving a viatical settlement will probably affect any public assistance you may be receiving that is based on financial need. Also, settlement proceeds are fair game to your creditors.
  • Check into alternatives. There may also be other means for you to get fast cash. Find out if your life insurance policy includes an accelerated death benefit. Sometimes, this option is built into the policy and you're not charged a fee unless you use it. Many policyholders might take comfort in dealing with their own insurance companies rather than a viatical company.

Continue to: What the viatical investor should know

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