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Selling a Life Insurance Policy
Did you know that you can sell your life insurance policy? This is becoming a popular solution for elderly couples that have reduced their debt or have no dependents, negating the need to wait for a pay-out upon their death. Or perhaps the policy holder becomes unable to pay the monthly premium but doesn't want to lose the money he/she has put into the policy in the first place. Selling is also popular with people facing a terminal illness who wish to cash in on a policy to help fund medical expenses. In all cases, the end product is the same-they sell their policy to an investor that pays them a percentage of the final benefit.
How It Works
The policy holder sells their insurance policy to an investor for a percentage of the face value of the policy. The investor then takes over the monthly payments until the policy holder dies. They usually track the policy holder though the remainder of his/her life with a postcard system or through a lawyer that is hired to keep tabs on the insured. When the policy holder dies, the insurance policy is paid out in full to the investor.
It's important to note that some investors will demand that any beneficiaries listed on the policy be notified of a sale. Some even require the beneficiaries' permission before purchasing the policy, since its sale will impact them in the future. If you have listed beneficiaries, you may want to consult with them first before selling your life insurance policy.
Viatical vs. Life Settlement
There are two different types of life insurance settlements that determine the amount of risk an investor has to assume when purchasing someone's life insurance policy. Viatical settlements and life settlements offer drastically different settlement percentages based on the face value of the policy.
Viatical settlements happen when a terminally ill person sells their life insurance policy to an investor to help settle medical expenses or so that they can enjoy their money before passing. The risk involved is less, because the investor knows roughly when the policy holder is going to die. Less risk usually means a larger pay-out. Viatical settlements usually realize 50-80% of the policy's value.
Life settlement happens when a policy holder wishes to cash in their policy with an investor. The difference is the policy holder isn't terminally ill, so the risk to the investor is higher-they don't know how long the policy holder will live. The pay-out is usually less than 50% of the policy's value.
Scams to Avoid
There are many scams out there that you'll want to avoid when dealing with life insurance and the whole concept of selling policies. The two most common are the 'Wet Paper' scam and the 'Clean Sheeting' scam.
- The 'Wet Paper' scam happens when an investor approaches an older person to take out a life insurance policy and then sells it within a short period of time after purchasing it.
- The 'Clean Sheeting' scam involves a medical person doctoring your medical records so you can apply for a life insurance policy that you wouldn't necessarily qualify for. Perhaps they erase evidence of a pre-existing condition, or they increase your overall health statistics. The policy holder then sells the policy to the investor.
To avoid being involved in a scam, make sure your life settlement investor is licensed. It's also a good idea to involve a lawyer to decide the terms of the settlement, because they'll be more likely to spot a scam than you may be. Plus, you'll have peace of mind, knowing your needs have been properly represented when dealing with an investor.
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