Life Insurance - Policy Replacement and Viatical Settlements
You may at some point want to exchange your old policy for a new one. Before replacement make certain that you compare the benefits and terms of the new proposal. It is also important to note, DO NOT DISCONTINUE YOUR CURRENT POLICY UNTIL THE NEW POLICY IS ISSUED.
This is a transaction where a new policy is to be purchased and it is know to the proposing insurer that by reason of the transaction, an existing policy has been or is to be:
Lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing insurer or otherwise terminated;
Converted to reduced paid-up insurance, continued as term insurance, or otherwise reduced in value by the use of non-forfeiture benefits or other policy values;
Reissued with any reduction in cash value;
Used in a financial purchase.
In most cases, the cash value of the current life policy is used to buy more insurance or a new policy. While a decision to replace an existing life insurance policy may be a good one, sometimes this may not be the best idea. More than likely the policy was purchased with a long term financial plan in mind. Replacing or changing an insurance policy at this point may affect the intended results of the overall financial plan. If you are considering replacing or changing a life insurance policy, you should first assess the client's needs and determine what is in his/her own long term best interest. It is also important to consider the interests of those you are protecting. Deciding how much insurance is needed, how long it is needed, and which policy provides the best coverage is crucial for financial security.
VIATICAL AND LIFE SETTLEMENTS
What is a viatical settlement?
A viatical/life settlement is an agreement where the owner of life insurance policy sells the policy for a pre-bargained-for payment, which is generally 50-80 percent of the policy's face value. In other words, it is the sale of a life insurance policy to a third party. The owner sells the policy for a cash payment that is less than the full amount of the death benefit. The provider continues to pay the policy premiums and upon the policyholder's death, cashes in on the policy for its full amount.
In order to fund the transaction, the provider seeks viatical settlement purchasers, who are investors that provide the money needed to buy the life insurance policies. These investors ultimately share in the proceeds from the policies.
The proceeds from the sale of life insurance by a chronically or terminally ill individual to a qualified viatical settlement company are exempt from federal income tax, as are accelerated death benefits.