The NASD has issued an Investor Alert warning senior citizens regarding the risks that come with selling their life insurance policies for “senior settlements” or “life settlements”- transactions that are paid in cash.
In its alert, the NASD says that while life insurance policies can be liquidated for cash, the costs that come with receiving a life settlement can be high, while negatively affecting a person’s finances. In addition, it is not easy to know whether or not a person is getting a fair rate for his or her policy. Factors to consider when thinking about whether or not to sell a life insurance policy include evaluating transaction costs, the financial effect of the sale, and the price to be received for the settlement. The NASD warns that it doesn’t have jurisdiction over all life settlements-only those connected to variable policies. It therefore cannot deal with any complaints involving other kinds of life settlements.
What Is a Life Settlement and How Does It Work?
A life settlement lets a person sell their life insurance policy to an entity, usually called a life settlement provider or a life settlement company, which purchases them in cash. These entities either resell the policies or keep them until they mature and their net death benefits can be collected. The payment received by a seller can vary, depending upon the policy’s terms and conditions, as well as the seller’s health and age. Usually the payment made will be less than the net death benefit but greater than the policy’s cash surrender value. The buyer of your policy will also usually agree to pay the remaining policy premiums until your death. The trade off is that they get your death benefit when you pass away.
What To Consider When Deciding Whether To Sell Your Life Insurance Policy
· The kind of life insurance coverage you can get to replace the policy that you would sell · Exploring other options for replacing your current life insurance policy besides a life settlement · Whether it might benefit you to keep your current policy and modify the terms and conditions that you have agreed to · Ensuring that you are getting the best price for your life insurance policy · Finding out whether receiving the cash payment might negatively impact your finances (For example, if you received public aid, you may not be eligible to participate in a specific program if you sell your insurance policy and receive a certain amount of cash for it.)
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Seniors Beware: What You Should Know About Life Settlements, NASD, February 8, 2007