Life settlements allow policyholders to sell their life insurance policies to third-party investors for an amount greater than the policy’s cash surrender value but less than the death benefit. While life settlements can provide needed money during one’s lifetime, there are several legal considerations to keep in mind when exploring this option.
Regulations
Life settlements are regulated at the state level, with most states having enacted some form of oversight and licensing requirements. These regulations are intended to protect consumers by ensuring proper disclosures are made about things like fees, as well as the risks and alternatives to life settlements. States also seek to regulate the sales practices and licensing of life settlement providers and brokers.
Contractual Obligations
When selling a life insurance policy, the policy owner signs over ownership rights and beneficiaries to the investor purchasing the policy. However, insurable interest laws typically prohibit investors to shop life insurance directly on another person.
As the original policy owner, you remain responsible for premium payments if the investor defaults. You also must fulfill obligations like notifying the life settlement provider of any changes in health status that could impact life expectancy. Failure to make required premium payments or disclosures could result in lapses in coverage.
Privacy Considerations
To evaluate a potential settlement, investors will require access to personal health and medical records to make life expectancy estimates. While life settlement companies are required to keep this information confidential, privacy advocates have raised concerns about consumers losing control of their private medical data. Some advise obtaining written assurances from companies regarding their privacy policies and data security protections.
Tax Implications
The amount received from a life settlement that exceeds your policy’s cost basis gets taxed as ordinary income. However, life settlement payouts can alternatively be structured as loans secured by the policy’s value, which delays any tax liability until after the insured’s death. The unpaid loan balance then gets deducted from the death benefit.
Complex tax rules govern these kinds of arrangements, so professional tax expertise is highly recommended when exploring alternatives.
Seeking Legal Advice
Given the contracts, disclosures, and financial complexities involved, it is always prudent to have an independent attorney review life settlement agreements before signing anything. An experienced lawyer can help explain terminology, ensure proper processes are being followed, and flag any contractual provisions related to issues like premium non-payment or privacy matters. They can also provide guidance on potential tax considerations.
The legal intricacies around life settlements demonstrate why this option merits careful consideration and quality professional support. While life settlements provide an alternate source of funds for policy owners, make sure you understand all the rules, regulations and obligations involved before signing away rights to your policy.
Shopping quality life insurance providers can help ensure you select adequate coverage for your needs and avoid situations where future life settlements become necessary. With the right legal support and advice, life settlement arrangements can be structured and implemented successfully.