Q. My mother wants to sell her whole life insurance policy to a company that will give her cash now. You see these advertised on TV. She doesn’t really need the money now and I don’t really need the money when she dies, but it seems wrong that they would give her such a small percentage. What do you think?
A. These type of transactions are called “life settlements” or “viatical settlements.”
They can be complicated.
If your mother “assigns” the policy to this company, the company now owns a life insurance policy on your mom, said Paul Criscione, a certified financial planner with Freedom Capital Management in Colts Neck.
He said the company would pay the premiums for as long as she lives, and when your mom dies, the company can collect the death benefit.
The cash they’re offering your mom is what the company believes is the fair value difference between these two sums, Criscione said.
“If it’s a small percentage, chances are that your mother is healthy and still has a long time to live, ergo, the company will not receive the death benefit for quite some time although they paid out the policy and are obligated to pay premiums until death,” he said.
Criscione said the life settlements market serves a purpose in today’s marketplace for sellers who are terminally ill or under major financial stress without access to any other liquidity options, he said.
“If you both do not urgently need the money, why consider such a transaction?” Criscione said. “The policy can only increase in value over time. If an unfortunate event occurs, this policy would be best deployed at that time at its’ maximum value.”
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