What is a life settlement? Does Michigan regulate them?

We are talking about life insurance and its place in an estate plan. As we explained in our Nov. 16 post, life insurance can be part of a retirement plan, too. If you own your own policy, and the policy is for permanent life insurance, you may be able to turn it into cash. Among your options: You can borrow against the cash value, you can withdraw some of the interest that has accrued, or you can take a life settlement.

A life settlement generally involves three people or businesses: a policy owner, a broker and a purchaser. You are the policy owner if yours is the insured life and you pay the premiums. In some states, a broker must be licensed to work with life settlements. This is not the case in Michigan. Every agent must be licensed, but there is no special designation for life settlement brokers. As for the purchaser, it is the broker's job to find a third party, usually an investor, to buy your policy.

You will negotiate the terms of the sale, but in general the sale price includes both your accrued interest and a portion of the death benefit. The purchaser takes on the premiums and becomes the beneficiary. When you die, the purchaser will receive the payout from the insurance company. You get the cash.

There are tax implications, of course. The interest accrued on the policy may qualify as taxable income, while any amount over the cash value of the policy may be treated as capital gains. The law is not clear, according to the Life Insurance Settlement Association, so it is best to consult your estate and retirement planning attorney or tax specialist in advance.

Your adviser can help you determine if there are fees and what the effect of the fees on your payout or your estate will be. You should also ask about how the payout will affect current or future Medicaid benefits.

Most life settlements involve policies with death benefits of $100,000 or more. Most policyholders who take advantage of life settlements are over 65.

The most important piece of advice anyone can give about life settlements is that consumers should be careful about "special offers" and "deals" they see advertised in magazines or on television. In the past, bogus brokers have taken fees up front and never seen a dime of the settlement.

Source: NerdWallet.com, "Before Death Do Us Part: Selling Your Life Insurance Policy," Alice Holbrook, May 5, 2015

Categories: Estate Planning