Life insurance can serve a purpose but at some point an existing life insurance
policy no longer is necessary. This might happen if your children are living
independently and you have accumulated sufficient assets to provide for a
surviving spouse.
In this situation, you can sell your policy to a third party. Even after paying
tax, the amount you receive may exceed the proceeds from cashing in the policy
or letting it lapse.
Such transactions originally were “viatical settlements,” which involved
policies sold by terminally ill individuals, often those with AIDS. However,
recent medical advances have made it more difficult to forecast life expectancy
precisely, which makes it harder to set prices for such policies.
As a result, the focus today is on “senior life settlements,” in which policies
are bought from individuals who are not terminally ill but who have relatively
short life expectancies. With cancer, heart attacks, diabetes, etc., longevity
may be predicted, within a range of years.
The shorter the seller’s life expectancy, the greater the purchase price, as a
percentage of the policy’s face value. A seller with a life expectancy between
one and two years, for example, might receive 60 percent of the policy’s face
value while someone with a 15-year life expectancy, might be offered only 15
percent of the policy’s value.
