Last Updated: August 31, 2009
It's not an unlikely scenario. You're strapped for cash for whatever reason and you discover that you can sell you life insurance policy to a third party and get more than the cash value of the policy though not nearly as much as the death benefit. It's called a life settlement, a fairly new type of transaction designed to help you get what could be some much-needed money to pay your mortgage or health-care expenses.
But financial planners say that life settlements are not for everybody. In fact, financial planners often say that you should consider a whole range of options before using a life settlement.
"Selling life insurance is frequently a bad idea," said FPA member, Scott P. Noyes, CFA, CFP®, of Noyes Capital Management. One reason why: Any gain on the policy over the imbedded investment value is considered ordinary income and taxed at your normal federal and state tax rate. "The insurance seller may have a large tax hit," Noyes said.
Noyes suggests a better option to a life settlement: Ask your children to buy your policy and make the premium payments. By doing this, your children will receive the death benefit on the life insurance party instead of a third party who has no relation to you or your loved ones. By the way, if they're strapped for cash, he recommends that they borrow from a lender to make the premium payments.