Should you sell your life insurance policy? It all depends on your situation. You might (or might not) have the option with your policy, and it may (or may not) make good sense to sell it.
Even high-profile individuals are selling policies, although the transactions are completely private. In one case, however, the family’s financial troubles had become public, as well as the solutions they sought.
Ed McMahon, the former co-host to Johnny Carson on The Tonight Show, was a generous celebrity. Gifted with an optimistic personality, a hearty laugh, and decades of career success, McMahon lacked budgeting and financial skills. McMahon lost his health in 2007, then nearly lost his home to foreclosure in 2008 before passing away in 2009 at the age of 86.
According to CNBC.com, he had defaulted on a $4.8 million dollar mortgage to Countrywide. Apparently, not even a celebrity like himself was immune from the foreclosure crisis. In 2008, McMahon appeared on Larry King in a neck brace—the result of a fall that had kept him from working—and addressed the widely-reported news. “If you spend more money than you make, you know what happens.”
As an alternative investment, life settlement funds are gaining popularity with those seeking investment alternatives outside of the stock market. This is no surprise. After all—most retirement plans and 401(k) accounts rely on stock market speculation for gains. As investors grow increasingly wary of stocks running out of steam after a nearly decade-long rally, they are seeking alternatives. In this article, we will look at three ways a life settlement fund can help seniors retire with more money in their pockets.
First, let’s review the definition of a life settlement and a few basics.
“This might be the best investment you’ve never heard of.” – Kevin Nichols, private equity fund manager
Are You an Investor Seeking Stock Market Alternatives?
We think people are tired of the word “investments” meaning only the stock market. In broker-dealer circles, even “alternative” investments often refer to products within the mutual fund world, such as REITs (Real Estate Investment Trusts that are securities, not property) or mutual funds that invest in precious metals.
By contrast, life insurance is an entirely different beast, based on actuarial math rather than the rising and falling of stocks, funds, and indexes (though NOT classified as an “investment”). However, there is a life-insurance based investment that has been gaining popularity with many corporate and sophisticated investors: life settlements.
Hedge funds, pension funds, multinational banks, and other major financial corporations purchase life settlements. Even Warren Buffett invests in life settlements. According to Affluent Magazine, “Berkshire Hathaway invests $600 million annually in life settlements and even owns a private company that sells life settlements.”
“Old age isn’t so bad when you consider the alternative.”
– Maurice Chevalier
“Am I too old for life insurance?”
We get this question a lot, surprisingly, often from people who are only in their 50’s or 60’s. But even if you are in your 70’s or beyond, you’re probably not too old for life insurance, particularly whole life insurance.
Most mutual insurance companies will insure people up to age 85 with a whole life policy. Health is more important than age when it comes to determining whether or not you will qualify. But many people over age 60 or 70 qualify for life insurance, even with a past health crisis.
However, just because you CAN get life insurance doesn’t mean it’s right for your situation. Let’s explore why many seniors ARE buying life insurance, along with some of the pros and cons of doing so. This article is for you if you:
wish to leave an inheritance for children or grandchildren
want to protect your significant other
desire the flexibility and liquidity that whole life provides
are a middle-aged adult considering whole life insurance for a parent.
I don’t want to tell you how much insurance I carry with the Prudential, but all I can say is: when I go, they go too.”
– Jack Benny, comedian (1894-1974).
An on-air penny-pincher who pretended that he would sooner die than part with a dollar, the real Jack Benny was a kind and generous man. Also an excellent planner, his widow was well-taken care of after his death and even received a daily red rose from the local florist, a provision arranged for in his will.
Ed McMahon, the former co-host to Johnny Carson on The Tonight Show, was another generous celebrity. Gifted with an optimistic personality and a hearty laugh, McMahon lacked Benny’s budgeting and strategizing skills. (Perhaps he took more after the Celebrity Sweepstakes Winners he helped create….) In spite of decades of career success, McMahon lost his health in 2007, then nearly lost his home to foreclosure in 2008 before passing away in 2009 at the age of 86.
While Donald Trump reportedly may have assisted the aging, ailing celebrity to stay in his home, the McMahons were also helped by another friend who told them about Life Settlements. As Pam McMahon (Ed’s widow) reports, they were previously unaware that they could sell a life insurance policy, thus using it as a liquid asset in a time of need.
Ed McMahon carried multiple life insurance policies, and the premiums became an unmanageable burden to them, especially when injuries prevented him from working. According to a letter written by his widow Pam McMahon,Ed had more than one policy and they were able to sell one to ease their financial stress.
More Seniors Are Selling Their Life Insurance Policies
Interestingly enough, another well-known celebrity has chosen to endorse Life Settlements (and probably not because she needs a paycheck – this octogenarian is still red-hot in show business!) Actress Betty White has done commercials for a company in the Life Settlement industry and has gone on record stating that she “would encourage any senior who is considering letting their life insurance policy lapse to consider a life settlement.” (I can’t help but wonder if she is the friend who helped the McMahons with her advice….)
But there are many other reasons, besides financial stress, to consider selling a life insurance policy. The beneficiary may have passed away. The policyholder might simply wish to use the money differently, such as starting a business or sending a grandchild to a private college. The policy holder may have multiple policies and no longer need them all, or the policy may insure a “key man” in a business partnership who has retired.
Is selling your life insurance policy the only solution for seniors seeking cash?
Absolutely not! Many seniors simply don’t qualify. For instance, if you are healthy and in your 70’s, it is doubtful that you could find a buyer for your policy. Life settlement investors and their intermediaries are looking to buy life insurance policies of individuals who are nearing life expectancy. Typically, the insured is in their 80’s and/or in poor health. Even if you do qualify to sell your policy, it’s important to look at what option makes the best sense for your particular situation.
Oftentimes, retirees have “lazy assets” that could be put to better use. There are better options than earning one percent or so in a bank certificate of deposit. Sometimes, a reverse mortgage may make sense. (Learn more about that option in this podcast with Kim Butler.) Or perhaps you can change the SEQUENCE of how you are spending your assets. This strategy can help and reduce taxes and increase income!
We invite you to schedule an appointment to learn about ways to generate more cash flow. You can also sign up for our Prosperity Accelerator pack and you will receive an ebook and articles with our favorite strategies for income.
Do you own a whole life insurance policy? One advantage of a whole-life policy is that it gives you many options. For instance, the cash value can be used to pay up premiums so that no more premium payments are ever needed! There are other ways to use your policy to obtain cash (while you’re still living) – withOUT having to sell your policy.
Are you interested in investing in Life Settlement Funds?
“I am proud to be paying taxes in the United States. The only thing is, I could be just as proud for half of the money.” –Arthur Godfrey
Take the Sting out of Taxes with An Innovative Roth Conversion
Last week in “Escaping the Tax Deferral Trap, Part 1,” we busted the myth that tax-deferred retirement plans save money in the long run. (Not unless taxes go down and/or you earn less in retirement.) We looked at the truth about traditional 401(k)s and IRAs and explored some of the ways you can free your money from a tax-deferred account.
However, there are many situations where it pays to KEEP your dollars in a tax-deferred account, such as:
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