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For sale! – Life policy

For sale! – Life policy

Just like any other product, life insurance policies could also be sold out to third parties when the current owner is confronted with economic challenges or simply cannot continue paying premiums.

I was recently approached by a client who wanted to sell out his six year-term policy, after spending nearly three and half years on the policy. The gentleman would not take it kindly when I told him my company did not have such arrangement to sell out policies to third parties, as he claimed he did in Europe a few years back.

Indeed, it is a truism that in Europe and other parts of the world, life insurance policies could be sold out to third parties akin to selling shares on the stock market. This process is known as life Settlement.

 

How it is done

Typically, life insurance policies are considered assets, hence the owners of such assets can cash on them if they are financially handicapped. All they need to do is to find a buyer to sell the policy (GRIGSBY v. RUSSELL in a 1911 US Supreme Court ruling).

There are certainly some drawbacks to using life insurance to meet immediate cash needs, especially if you're compromising your long-term goals or your family's financial future.

Nevertheless, if other options are not available to enable you to raise funds, life insurance, especially cash-value life insurance policies, can be a source of needed income.

How it works?

In certain jurisdictions, one can easily convert one’s life insurance policy into cash whether it is a funeral cover or an investment policy, but sometimes the process can be very complicated.

First, you need to have the policy appraised to determine the selling value. Then, you’ll need to scavenge for a buyer. Once you have a buyer in place, you’ll receive a cash settlement on the policy and the buyer will continue to pay premiums and collect the benefit when you pass on or when the policy matures.

But locating a good buyer on your own can be complicated, if not impossible, which is why many people sell their policies to a settlement company or to a third party through a life settlement broker.

If you sell to a settlement company, you’ll receive a percentage of your policy’s value in cash. If you use a broker, you may also pay a commission to the broker. However, a broker may be able to find a better deal than you would on your own.

The challenges

The following are some of the consequences of selling out one’s insurance policy:

• Compromising on your long-term financial needs;

• Inability to meet your insurance needs in the future, leading to an unhappy and a tortuous ending;

• Beneficiaries would be deprived of their future benefits; and

• Your records and confidential information could be in the public domain.

What you need to know

There are a few things you should consider before selling your policy. For example:

• Your life insurance policy may not have much value on the market. Life settlement brokers believe that only about 25 per cent of the policies they see are worth so much.

• You won’t get the full face value. Most sellers received about 13 per cent to 21 per cent of the value of their policy.

• Brokers charge high commissions. The 2009 commissions’ rate for brokers in Europe, for example, was about nine per cent.

• Buyers don’t want every policy. Buyers are always looking for people over the age of 65 with chronic or terminal illnesses. If you’re young and healthy, your policy won’t be attractive to a buyer.

• You may have tax complications. Your settlement could be subject to income tax.

• Your eligibility may change. Life settlement could change your eligibility for government assistance programmes.

• It isn’t your only option. If you’re selling a policy because you need cash, you may have other options, such as taking a loan against your life insurance policy if one exists on the policy, accelerating your payout date or selling the policy to a family member.

However, keep in mind that these options also have pitfalls and should be discussed with your financial advisors.

The way forward

Insurance penetration, particularly, life Insurance in Ghana and the sub-region continues to be low, averaging some two per cent. In this regard, insurers may have to consider offering policyholders the opportunity to sell their policies to third parties when the need arises. Often, there have been instances where policyholders have come across some unpredictable events such as loss of job and unplanned travel abroad.

In these circumstances, selling out one’s policy would be most desirable compared to allowing policy surrender or cancellation, which tends to negatively impact on the industry at large. The National Insurance Commission (NIC) may also stimulate a discussion on this concept not only to encourage industry players to implement it, but most importantly, deepen public education and interest.

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