Insurance

Did you know that there are firms that will buy your life insurance?

For those that no longer need the coverage or are tired of paying annual premiums, there is no short list of firms that want to give you some money, take over your premium payments, and become your beneficiaries. Why would they want to do that? Simple. They have figured a way to invest money for your premium payments, pay you some money on top of that and receive a nice profit based on your life expectancy and upon the face amount of the insurance policy on your life.

There are variations on this theme. Firms are encouraging people to sell their excess insurance capacity. They view this insurance as an asset. Now, why should you consider this? For example, you are age 78. You are approached with an offer to buy life insurance on you and pay the premiums so that a third party (investment firm) will ultimately receive the death benefit. This might be a great deal for the investment firm that is purchasing the life insurance policy on your life, but it does nothing for you! You wouldn’t even have a reason to allow an investment firm (a Wall Street Brokerage firm, Hedge Fund, Bank) to do this unless you accept an offer to purchase your insurability.

You might receive an offer for up front money, or an offer to pay you at the end of the contestability period which is two years after the policy commencement date.

Legal? Absolutely, except in New York, where there have been issues raised as to whether or not institutions financing life insurance have insurable interest in the party selling their insurability.

A little morbid? But upon some reflection it kind of makes sense. Most people never buy as much life insurance as they could. The money that they receive for selling their insurability can be used for charitable gifts, to purchasing regular life insurance for your heirs, or funding a more comfortable retirement.

Here is an example. John is approached by a life insurance agent to “sell his insurability”. After two years, he receives a sizeable check, $150,000. The amount he receives is based on his age, and net worth, and this net worth (or insurable interest) is tied to how much insurance can be obtained on an individual. John then decides that instead of giving this money to charity, or spending it on cruise, to purchase life insurance on himself so that he can leave more money to his children or grandchildren. So he purchases a single pay life insurance policy with the $150,000 that provides a tax free benefit to his heirs of $375,000. This new policy cost John nothing as it as obtained with the proceeds fo selling his insurability to another investment firm. And as a result, John’s heirs will have a lot more money upon his passing.

Life insurance is a leveraged product. It is a simple concept. You give a life insurance company a bunch of money, and when you die they give a bigger bunch of money to someone you love or care about. The wonderful benefit of life insurance is that the death benefit is passed free of ordinary income taxes and if titled correctly, free of estate taxes.

Life settlement cases are somewhat controversial. The idea of having some intuition profit at your death seems somewhat surreal. It is a leveraged bet. If you life too long, the investment firm that purchases your policy does not make as much money as they would like, and if the insurance company makes more money because of the steady stream of premium payments. If you die sooner rather than later, the investment firm profits. There is a dynamic relationship. However for the insured that does not want to pay for life insurance and would like to sell their insurable interest, the substantial payments of 10-20% of the death benefit after two years is “free money”. If you are between the ages of 70 and 85, and have a minimum net worth of $2 million, this is worth looking into.

Gregory Costa is President of Sextant Financial & Estate Tax Planning and the AnnuityProfessor.com, with offices in Boca Raton and Hollywood, Florida. He can be reached at AnnuityProfessor.com