| Most people do not know they can sell an | | | | interest turns into compound interest. |
| insurance policy. There are companies that will pay | | | | Over time, the loan and the unpaid interest can |
| you more than the cash value. Even term | | | | consume the entire cash value. That's when you |
| insurance, which has no cash value, is a candidate | | | | get the letter from the insurance company telling |
| for purchase. | | | | you that to keep the policy in force, you need to |
| This transaction is called a life settlement. Life | | | | come up with some astronomical amount of |
| settlements have been on the scene since 1995; | | | | money. |
| they are not new. While the purchase is facilitated | | | | But that's not the worst of it. When you call your |
| by an insurance company, the buyers typically are | | | | agent to see what your other options might be, |
| pension and institutional funds which hold the | | | | he or she informs you that if the policy lapses, |
| policies in their investment portfolios. | | | | there will be a gain (cash value less premiums |
| Here are three common reasons why a person | | | | paid) that the insurance company is required to |
| would sell their insurance policy... | | | | report to the IRS. Worse yet is the fact that |
| 1. The policy has outlived its usefulness. | | | | there is no money in the insurance policy to pay |
| 78% of all insurance is purchased for family | | | | the tax (remember it lapsed for lack of premium |
| protection. Families with children insure the | | | | payment and/or lack of any remaining values). So |
| breadwinner(s) until they have had the time to | | | | you are going to have to come up with the tax |
| build up an estate or an adequate 401(k) plan to | | | | from someplace else. I don't think you would |
| provide for the family, pay off a mortgage and | | | | consider getting this information one of your |
| educate the children. Most people have been there | | | | better days. |
| and done that. | | | | 3. You own Universal Life and interest rates have |
| However, later in life these needs may have | | | | declined. |
| disappeared. The house is paid for, the kids have | | | | Getting this news is another bad day at the mail |
| been to college and your 401(k) plan has a | | | | box. This time the letter from the insurance |
| balance ten times greater than your life insurance | | | | company says that in order to keep the policy in |
| face value. | | | | force, you have to come up with more than you |
| Rather than continue to pay premiums, or | | | | could get for your first born. |
| surrender it for its cash value, you can sell it for | | | | How this occurs goes back to when you bought |
| more than the cash value. Buy a boat, take an | | | | your policy. One of the major factors in |
| extended vacation or go down to the dealership | | | | determining the premium for a given face amount |
| and plunk down cash for that car you have | | | | of Universal Life is the interest rate assumption |
| always wanted. | | | | made in the original proposal. Remember the |
| 2. The policy has a large loan. | | | | double-digit interest rates? You could have bought |
| There are three common ways a policy can | | | | your policy during this time frame. Most insurance |
| acquire a large loan. | | | | agents would have suggested using a lower |
| First, at some point you simply took a maximum | | | | interest rate assumption to be conservative. |
| loan against your policy. It could have been to | | | | However, interest rates have declined to even |
| satisfy an emergency, take advantage of an | | | | below these play-it-safe assumptions. |
| investment opportunity-any number of things. But | | | | The sale of your insurance policy averts all three |
| the loan was never repaid. | | | | of these problems. In the first case, you don't |
| Second, you could have taken a modest loan | | | | have to pay any more premiums for coverage |
| years ago and never paid anything toward the | | | | that is no longer needed. In the second, the |
| principal. Every year, however, you received a bill | | | | problem you have with the loan disappears and is |
| for the interest due. If you are like many people, | | | | replaced by cash. And in the third, the probable |
| this goes in the round file and you never pay the | | | | lapse of the policy due to the fact that the |
| interest. What happens is that the interest gets | | | | premium to maintain the coverage is off the |
| added to the loan. So what is originally simple | | | | charts is offset by the cash received via a sale. |