Generate cash from a whole life insurance policy
Given recent and ongoing market corrections, various Ponzi schemes like those perpetrated by Bernie Madoff and a general unwinding of the wealth effect, many people are looking to generate cash from current assets. Also given that the real estate and credit markets are virtually frozen, especially at the top end, Aspen investors may conclude that they have few options for generating cash outside of traditional means.One asset that many may overlook is a whole life insurance policy. Historically, individuals had few options if they no longer wished to pay premiums or wanted cash from a policy they held. These included: Surrender the policy for paid up. Surrender the policy for cash value. This could be a poor choice especially with guaranteed universal life contracts used for estate planning purposes because they favor death benefit over cash value. Allow the policy to lapse. A disastrous choice to be avoided at all costs unless you want to contribute to the companys coffers instead of your own. Talk to a good life insurance broker and use the cash value in your current policy to get a new contract that may have substantially more death benefit, and/or lower premiums than your current whole life insurance policy. Now, a more viable option is available the life settlement. This has happened because a secondary market has developed for whole life insurance. Hedge funds, institutional investors, and others who wish to make a good rate of return with a non-market correlated instrument, may purchase your policy for substantially more than its current cash value. Thus, your whole life insurance policy may have a current fair market value that can be determined by using a life settlement broker to submit your policy to multiple investors, generating a lump sum payment for you. The life settlement option could be a good choice for some people. Once the process is started, it can take from 16 to 20 weeks to complete and there will be applications, medical records releases and other procedures that will be used to ascertain the market value of your policy. One thing that is important to note is some settlement companies and brokers submit a policy to only one or two investors. Chances are any offers will be substantially more competitive if the investors know that they are bidding against numerous competitors.Life settlements can be a valuable source of liquidity for whole life policy owners whose needs have changed, or may otherwise surrender those policies, or allow them to lapse.Life settlements are not for everyone. There are many factors to consider such as the need for continued coverage and any plans to replace an existing policy with another policy. Carefully consider such factors as the ability to obtain new coverage, the adequacy of any new coverage and the cost of comparable coverage. The insured and life settlement broker must assess the clients circumstances, including financial needs and investment objectives, tax consequences, and other relevant implications of selling a policy.
Drew Kitchell is a financial advisor specializing in life insurance, life settlements, and estate planning with Financial Partners of Aspen. He can be reached at 925-9600 or dkitchell@FPaspen.com.This article is a feature of Inside Business, published Tuesdays in The Aspen Times.
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