Get Free Home Insurance Quotes Quickly & Easy

A homeowners insurance policy acquired on your life will become less valuable to the new owner the longer you live (and the longer that investor is paying premiums to maintain the policy). Since there are currently no Treasury regulations on this issue, interested readers should seek tax counsel. Certain life settlement institutions suggest that the taxable difference between the settlement value and the cash value should be taxed at capital gain rates. Traditionally, when a policy is surrendered and the gross cash value exceeds the net premiums paid for the policy, the excess is taxed at ordinary income rates. This new wrinkle in the homeowner's insurance industry poses some intriguing issues: If the fair market value of a policy exceeds its cash value and the fair market value exceeds the policy owner's tax basis in the policy, how is a sale taxed? Cash value policies also qualify (only 10 percent of issued Universal Life policies have turned into death claims in the 25 years that this policy form has existed), and Conning & Company found " that more than 20 percent of the policies owned by seniors have life settlement values in excess of their cash surrender values." The University of Pennsylvania's Wharton School estimated that in 2002, policy owners received $242 million more in sales proceeds than would have been forfeited to insurers if the policies had simply been dropped.

In the typical life settlement, the ideal candidate is over age 65, has experienced a deterioration of health but is not terminally ill, has a homeowners insurance policy with a death benefit of at least $250,000, and no longer needs or can afford the policy. Fair market value will generally exceed the policy's cash value for those age 65+ and in less than good health. Life settlements provide a new option for policy owners who are concerned that they cannot afford the revised premiums required by many policies that have not met their illustrated projections. As a result, life settlements are almost always purchased by institutional investment pools whose individual investors have no access to the identity of the insureds under the acquired policies. At least in theory and in the extreme, a third-party owner of a life settlement policy has an economic interest in an untimely death.