HOW IT WORKS – “With the current downturn in the economy, people are rethinking all their expenditures, including their life insurance premiums,” says David Fastenberg, president of Life Insurance Solutions LLC in Jacksonville, Florida. If your premiums are too high, or if the kids are grown and you don’t need the policy anymore, or if you have a better use for that money—such as health care expenses—you can sell your whole-life policy to a third party in a transaction called a life settlement. (Unlike term insurance, a whole-life or universal-life policy builds cash value-think of it as a combination savings account and insurance policy.)
In general, to qualify you have to be 65 or older and have a whole-life policy with a face value of at least $250,000 (or a policy that can be converted to whole life). An insurance broker shops your policy around to life settlement providers who represent buyers—usually investment firms. They will offer more than the cash surrender value—the amount available when a policy is canceled—but less than the death benefit. How much more depends on your age and your health: The older and sicker you are (fortunately or unfortunately), the more you’ll get. The investors pay the premiums as long as you live, and collect the death benefit when you die.
And they keep tabs on the health of their investment—you. “Follow-up is usually done annually, but it can be quarterly,” says Fastenberg. You can be the contact or nominate someone you know if you don’t want to take the “So how are you feeling?” calls.
WHAT IT COSTS – Life settlements are relatively new and not yet well regulated, so how do you know whether you’re getting the best deal? Tom Orecchio, chair of the National Association of Personal Financial Advisors, suggests the following:
- Ask a fee-only insurance or financial expert to evaluate your situation and determine your policy’s worth.
- Make sure your broker discloses his commission. “You’re better off paying a commission on the value of the purchase price than on the face value of the policy,” says Orecchio. “Try to keep it between 3 and 6 percent.”
- Don’t accept the first offer. Ask your broker for at least three bids.
BE CAREFUL BECAUSE – You may be selling an asset for much less than its value. And there is still a life insurance policy on you—now held by strangers—so it may be difficult to get additional insurance.
IT MADE SENSE FOR – Brian Redman, who had a successful career as a race-car driver, winning at tracks throughout Europe and the United States. He’d carried a $1 million life insurance policy for years, with an annual premium of $6,500. When he learned at age 69 that the policy would expire when he turned 70—and would cost $36,000 to renew—he felt like he’d just hit the wall at Daytona. “I politely declined to keep the policy,” he says. But then his insurance agent told him about life settlements. He sold his policy and received a check for $86,000.
Now 71 and living in Vero Beach, Florida, Redman shows up occasionally at his old haunts to take a classic car around the track. “But every few months, I get a call from a very nice lady who inquires after my health,” he says with a laugh.
REMEMBER, these unconventional tools may ease your cash crunch, but read the fine print before signing anything. They all come with significant, even costly, downsides. Never enter into any of these arrangements without consulting a fee-only financial planner (who doesn’t sell financial products). Find one at napfa.org.
“People may have to resort to last resorts,” says Mary Schapiro, CEO of the Financial Industry Regulatory Authority, a nongovernmental agency focused on investor protection and market integrity. “But they should take these steps with their eyes wide open.”
MORE WAYS TO BORROW CASH
Peer-to-peer lending sites aim to inject a little Main Street into the traditional Wall Street approach of banks. As the field grows, the Securities and Exchange Commission is racing to impose regulations. The SEC-approved lendingclub.com facilitates loans between lenders and borrowers with good credit. Prosper.com puts a loan out for eBay-type bids-the borrower takes it or leaves it. (At press time, the site had halted new activity and asked the SEC for permission to resell loans.) Loanio.com focuses on loans for riskier subprime borrowers. College students looking to finance their educations can try fynanz.com and greennote.com.
YOU NEED A SAFETY NET
The annual U.S. personal savings rate has been hovering around zero since 2005. Credit is increasingly scarce. Your best defense: Start living within your means and put away some cash for emergencies.