When it comes to personal assets, people usually think of real estate, vehicles, land, and cash – life insurance policies are typically left out of the equation. Traditionally, life insurance policies are purchased to prepare for end-life-costs such as medical and funeral expenses.
Sometimes, in hopes of avoiding financial distress, people will sell their life insurance policy to an investor for cash. This is called a life settlement transaction.
What is a life settlement?
A life settlement refers to the selling of a life insurance policy in exchange for cash. This amount is usually more than the policy’s cash surrender value, but less than the death benefit.
When the original owner of a policy sells, they transfer all ownership and beneficiary rights to a third party. This third party will then become liable for premium payments and will be entitled to the policy death benefit. Selling a policy on the secondary market wins on average four to eight times more money than insurers would pay as the cash surrender value.
This practice is only recognized in a handful of provinces throughout Canada. Often times, senior citizens find they are holding onto an in-force life insurance policy that has either become unwanted or unaffordable. Instead of lapsing on a policy, the argument has arisen that seniors should have the ability to sell their life insurance policies in an open and free market should circumstances benefit from cash assets. When a policy lapses, insurance companies no longer have to pay out the full amount to beneficiaries, thereby saving billions of dollars annually instead of rightfully getting the funds to seniors.
The controversy over life settlements stems from the concern that seniors are prone to being victimized and taken advantage of by fraudulent practices. If people are using their policy ahead of time, they will not be privy to its full value when they are supposed to, nor will the beneficiaries have the full value of the policy.
All policies come with rules, and understanding them without the aid of a financial advisor can be tricky. When in a dire position and in need of liquid funds, it can be difficult to not accept the first offer available, but it is important to shop offers before making a final decision. A financial advisor can help to sort out any fine print related to tax liability, and also make proper recommendations if any outstanding debts exist and can impact a life settlement.
Preszler Law Nova Scotia handles insurance related disputes for clients in Nova Scotia. They work directly with insurance companies and take control of the paperwork and documentation process to properly assess each individual case. Life settlements may not be the most appropriate course of action for everyone, as some third parties are highly selective about their target insured profile. For this reason, working with legal representation is a safe way to get the most benefit out of such a binding decision.
Clients have the ability to arrange a complimentary consultation with a skilled and dedicated lawyers at Preszler Law in order to determine the best course of action for individual needs.
Deciding to take action and pursue a life settlement is not a decision to be made lightly. While the immediate benefits are obvious, it is wise to exercise caution and feel confident that any policy sale will have the most positive impact and outcome.