Putting Your Life Insurance on the Block

From: WSJ
In recent years, a new option has emerged for older adults who own life-insurance policies they no longer want or perhaps can't afford to maintain.

The traditional process for cash-value policies involved surrendering the policy to the insurance company and receiving the accumulated savings component. Today, investors will buy that policy for considerably more, although less than the benefit payable upon death. They on occasion also will buy "term" policies that pay a death benefit but don't have a savings component.

When such deals -- known as life settlements -- work as advertised, they can free up substantial amounts of money that potentially can be used however the policy owner sees fit. One example: investing for higher returns than are typically available from an insurance policy.

Watch for Pitfalls
That said, life settlements have significant potential pitfalls. The most serious is that it's extremely difficult for sellers of a policy to know whether they're getting the best deal possible. As a result, life settlements have been drawing the attention of regulators who allege backroom dealings and predatory sales tactics.

There are a host of other issues to consider. The payout from a life settlement can lead to a big tax bill and affect Medicaid eligibility. (In contrast, at a policyholder's death, life-insurance benefits paid to heirs aren't subject to income tax.) Your medical history can be widely shared with many parties.

In the end, there may be other more attractive options, such as exchanging your policy for another insurance offering that can potentially earn higher returns.

The pitch is "free money," says Glenn Daily, a fee-only insurance consultant in New York who provides independent evaluations of life-settlement proposals. And while it can be a good strategy under certain circumstances, "it doesn't mean you shouldn't ask a long series of questions."

Life settlements usually are aimed at policies with a death benefit of at least $250,000, although sometimes policies with death benefits as low as $100,000 will be considered. Policyholders need to be at least 65 years old and have a life expectancy at the time of the purchase of at least two years but no more than 12 to 15 years, depending on the buyer's criteria.

The buyers are mainly investment firms that, after purchasing the policies, continue to pay the premiums and collect the benefit when the original holder dies.

Obviously, it's in the investors' interest to keep the purchase price down. They also would prefer if you died sooner rather than later; a policy from a holder who is in declining health, or, say, is an active smoker, could be worth more than a comparable policy from someone who is healthy.

Acting as a go-between between the policyholder and the investor are brokers. Ideally the broker, who is supposed to act in the seller's best interest, will submit the policy to different potential buyers who might make a bid.

Factors affecting the purchase price offered include your age, medical condition and resulting life expectancy, the type of policy and the premiums involved in keeping the policy in force. It's possible to get widely differing bids.

From this purchase price a number of fees are deducted, the largest of which is usually the broker's commission.

The problem is "there's no transparency -- you're reliant on your broker to shop your policy around," says Mary Schapiro, chairman of the National Association of Securities Dealers, which published an "Investor Alert" on life settlements last month (available at nasd.com).

Ask the broker for a full accounting of what bids were received and what steps were taken to shop it around, the NASD suggests. In addition, it's important to ask if the broker is affiliated with a particular life-settlement company and thus may only be getting a bid from that one firm.

A Percentage of What?

Sellers should ask about commissions and any other charges.

Standard brokers' commissions have been 6%, but there may be subtle differences that can cost you big money. For example, some brokers charge commissions based on the purchase price, but others charge based on the policy's face value, a bigger figure -- which results in substantially less money in your pocket.

"If it's 6% of face value, that could be 20% or more of the purchase price," says Mr. Daily, who adds that policyholders shouldn't be afraid to haggle. "Commissions are negotiable."

Meanwhile, questions have been raised about collusion among buyers and brokers. Last October, former New York Attorney General Eliot Spitzer filed suit against one of the largest life-settlement buyers, Coventry First, accusing the firm of bid-rigging with one of its competitors that significantly short-changed investors.

In this alleged scheme, Coventry would make payments to brokers in exchange for them tilting the bidding process to ensure that Coventry was able to purchase the policies at lower prices. Emails presented as evidence showed Coventry officials haggling with brokers over what Coventry would have to pay to win the auctions. In one instance, Coventry is alleged to have paid a broker $200,000 in exchange for not presenting to the policyholder a bid that would have topped Coventry's bid on a $10 million policy by $425,000.

Coventry denies in court filings that the firm did anything wrong, saying it didn't have to disclose the payments to policyholders.

Other Routes to Consider

There may be other options that should be considered. If it's a question of not being able to afford the policy premiums, you can ask if dividends or the cash value from the policy can help with the payments. You also can ask a family member to contribute.

If there's a concern that the policy is earning subpar returns, under certain circumstances it can be exchanged tax-free for another insurance policy or an annuity -- if losing the death benefit isn't a major concern.

John Skar, chief risk officer at Massachusetts Mutual Life Insurance, and a vocal critic of life settlements, says policyholders should keep in mind that sophisticated investors believe they are getting good value in the policies they buy. But once commissions and taxes are taken into consideration, most policyholders who sell are going to have a hard time matching what they have given up, he argues.
Copyrighted, Dow Jones & Company, Inc. All rights reserved.

Return of Premium Term Life Insurance?

From: WSJ
Question: Is the return-of-premium term-life-insurance product as well-established and reliable as a typical term policy? -- A.R.
Answer: Return-of-premium term-life-insurance policies have become increasingly popular recently, accounting for 10% to 15% of new term-life-insurance premiums in 2006. More than 20 insurers offer them, up from a handful five years ago.
Often the feature is offered as a rider on regular level-premium term policies of 15, 20 and 30 years, but it's also available as a base policy. Insurers charge 50% or more above the cost of a regular term policy for the right to get all or most of your premiums back if you don't die before the end of the term. Shorter-term policies are more expensive, says Robert Bland, chairman and CEO of Insure.com, an online insurance broker.

The least expensive $1 million, 30-year-term policy with a return-of-premium rider for a 40-year-old man in California is roughly $2,160 a year, compared with $1,240 for the least-expensive regular term policy. That works out to roughly a 5% return on the extra $920 in premiums, says Glenn Daily, a fee-only insurance planner in New York.

If you let the policy lapse generally in the first five or six years, you may not get any of your premium back, and term rates could have declined in the interim. As for reliability, the policy should be as sound as the insurer offering it. Check with A.M. Best, TheStreet.com ratings (formerly Weiss Safety Ratings) or Fitch Inc. for ratings on insurers.

Write to M.P. McQueen at mp.mcqueen@wsj.com
Copyrighted, Dow Jones & Company, Inc. All rights reserved.

life insurance products

Riders are modifications to the insurance policy added at the same time the policy is issued. These riders change the basic policy to provide some feature desired by the policy owner. A common rider is accidental death, which used to be commonly referred to as "double indemnity", which pays twice the amount of the policy face value if death results from accidental causes, as if both a full coverage policy and an accidental death policy were in effect on the insured. Another common rider is premium waiver, which waives future premiums if the insured becomes disabled.

Joint life insurance is either a term or permanent policy insuring two or more lives with the proceeds payable on the first death.

Survivorship life or second-to-die life is a whole life policy insuring two lives with the proceeds payable on the second (later) death.

Single premium whole life is a policy with only one premium which is payable at the time the policy is issued.

Modified whole life is a whole life policy that charges smaller premiums for a specified period of time after which the premiums increase for the remainder of the policy.

Group life insurance is term insurance covering a group of people, usually employees of a company or members of a union or association. Individual proof of insurability is not normally a consideration in the underwriting. Rather, the underwriter considers the size and turnover of the group, and the financial strength of the group. Contract provisions will attempt to exclude the possibility of adverse selection. Group life insurance often has a provision that a member exiting the group has the right to buy individual insurance coverage.

Senior and preneed products

Insurance companies have in recent years developed products to offer to niche markets, most notably targeting the senior market to address needs of an aging population. Many companies offer policies tailored to the needs of senior applicants. These are often low to moderate face value whole life insurance policies, to allow a senior citizen purchasing insurance at an older issue age an opportunity to buy affordable insurance. This may also be marketed as final expense insurance, and an agent or company may suggest (but not require) that the policy proceeds could be used for end-of-life expenses.

Preneed (or prepaid) insurance policies are whole life policies that, although available at any age, are usually offered to older applicants as well. This type of insurance is designed specifically to cover funeral expenses when the insured person dies. In many cases, the applicant signs a prefunded funeral arrangement with a funeral home at the time the policy is applied for. The death proceeds are then guaranteed to be directed first to the funeral services provider for payment of services rendered. Most contracts dictate that any excess proceeds will go either to the insured's estate or a designated beneficiary.

These products are sometimes assigned into a trust at the time of issue, or shortly after issue. The policies are irrevocably assigned to the trust, and the trust becomes the owner. Since a whole life policy has a cash value component, and a loan provision, it may be considered an asset; assigning the policy to a trust means that it can no longer be considered an asset for that individual. This can impact an individual's ability to qualify for Medicare or Medicaid. From Wikipedia, the free encyclopedia.

About Life insurance

Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness or critical illness. In return, the policy owner (or policy payer) agrees to pay a stipulated amount called a premium at regular intervals or in lump sums. There may be designs in some countries where bills and death expenses plus catering for after funeral expenses should be included in Policy Premium. In the United States, the predominant form simply specifies a lump sum to be paid on the insured's demise.

As with most insurance policies, life insurance is a contract between the insurer and the policy owner (policyholder) whereby a benefit is paid to the designated Beneficiary (or Beneficiaries) if an insured event occurs which is covered by the policy. To be a life policy the insured event must be based upon life (or lives) of the people named in the policy.

Insured events that may be covered include:

* Serious illness

Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; for example claims relating to suicide, fraud, war, riot and civil commotion.

Life based contracts tend to fall into two major categories:

* Protection policies - designed to provide a benefit in the event of specified event, typically a lump sum payment. A common form of this design is term insurance.
* Investment policies - where the main objective is to facilitate the growth of capital by regular or single premiums. Common forms (in the US anyway) are whole life, universal life and variable life policies.

Parties to contract

There is a difference between the insured and the policy owner (policy holder), although the owner and the insured are often the same person. For example, if Joe buys a policy on his own life, he is both the owner and the insured. But if Jane, his wife, buys a policy on Joe's life, she is the owner and he is the insured. The policy owner is the guarantee and he or she will be the person who will pay for the policy. The insured is a participant in the contract, but not necessarily a party to it.

The beneficiary receives policy proceeds upon the insured's death. The owner designates the beneficiary, but the beneficiary is not a party to the policy. The owner can change the beneficiary unless the policy has an irrevocable beneficiary designation. With an irrevocable beneficiary, that beneficiary must agree to any beneficiary changes, policy assignments, or cash value borrowing.

In cases where the policy owner is not the insured (also referred to as the cestui qui vit or CQV), insurance companies have sought to limit policy purchases to those with an "insurable interest" in the CQV. For life insurance policies, close family members and business partners will usually be found to have an insurable interest. The "insurable interest" requirement usually demonstrates that the purchaser will actually suffer some kind of loss if the CQV dies. Such a requirement prevents people from benefiting from the purchase of purely speculative policies on people they expect to die. With no insurable interest requirement, the risk that a purchaser would murder the CQV for insurance proceeds would be great. In at least one case, an insurance company which sold a policy to a purchaser with no insurable interest (who later murdered the CQV for the proceeds), was found liable in court for contributing to the wrongful death of the victim (Liberty National Life v. Weldon, 267 Ala.171 (1957)).

Contract terms

Special provisions may apply, such as suicide clauses wherein the policy becomes null if the insured commits suicide within a specified time (usually two years after the purchase date; some states provide a statutory one-year suicide clause). Any misrepresentations by the insured on the application is also grounds for nullification. Most US states specify that the contestability period cannot be longer than two years; only if the insured dies within this period will the insurer have a legal right to contest the claim on the basis of misrepresentation and request additional information before deciding to pay or deny the claim.

The face amount on the policy is the initial amount that the policy will pay at the death of the insured or when the policy matures, although the actual death benefit can provide for greater or lesser than the face amount. The policy matures when the insured dies or reaches a specified age (such as 100 years old). From: Wikipedia.com, the free encyclopedia.