N.M. Admin. Code § 13.9.15.18
Selling Your Life Insurance Policy
Today it's possible for you to sell your life insurance policy to someone else (a viatical settlement provider) for an immediate cash payment. This financial arrangement, known as a viatical settlement, is best suited for people who are living with an immediate life-threatening illness and facing tough financial choices.
It may not always be in your best interest to sell your life insurance policy. Before you take action, you want to be sure you understand:
1. What future benefits you may lose
2. What other options may be available
Selling your life insurance policy is a complex financial arrangement. This guide will help you make an informed decision.
We recommend that you:
1. Evaluate your needs
2. Check all your options
3. Understand how the process works
4. Know your rights
5. Check with your state insurance department.
Step 1, Evaluate your needs
Before you sell your policy and give up valuable insurance protection, think about whether your need for life insurance has changed since you bought the policy. If it hasn't, selling your policy may not be the right choice. If you sell your policy now, your beneficiaries will not be paid a benefit at your death.
If you sell your policy now, remember premiums go up a lot as you grow older. You may not want to pay the higher cost to replace your coverage later.
Step 2, Check all of your options
You may be able to get the cash you need now without selling your policy.
Policy Cash Values
Contact your current life insurance agent or company to see if you have any cash value in your policy. Ask if you can:
1. borrow from the cash value and still keep the insurance in force,
2. cancel the policy for its current cash value,
3. use the cash value as collateral to get a loan from a financial institution.
Your insurance company must tell you about your options if you ask.
Accelerated Death Benefits
Find out if your policy has an "accelerated death benefit." It may be your best option.
Many life insurance policies do have an accelerated death benefit. With that benefit, policyholders who are terminally ill, affected with certain diseases or permanently confined in a nursing home can access 50% or more of a policy's death benefit while still living. An accelerated death benefit could pay you a large part of your policy's death benefit and you could keep your policy.
A very important feature of the accelerated benefit is that when the policyholder dies, the beneficiaries get the remaining death benefit. This means that eventually 100% of the policy benefits will be paid out either to the insured or the beneficiary.
Other considerations
Think about what it will mean if you do sell your policy. Check out the tax implications. Not all proceeds from a viatical settlement are tax-free.
Find out if creditors could claim any of the money you would get from a viatical settlement.
Find out if you will lose any public assistance benefits such as Medicaid or other government benefits if you accept a cash settlement for your life policy.
Comparison shop
To learn the market value of your policy, it's a good idea to contact three to five viatical settlement providers. Or you could use a viatical settlement broker who would contact several viatical settlement providers for you. Your financial advisor can help you decide whether to work with a viatical settlement provider or through a viatical settlement broker.
Summary
Everyone's financial situation is different. A viatical settlement may or may not be the best approach for you. Check it out for yourself. We recommend that you ask an advisor who is qualified to review your finances to help you review your options.
Step 3, How the process works
If you decide to sell your life insurance policy to a viatical settlement provider, you will enter into a viatical settlement agreement with the provider. You, the seller, agree to accept a cash payment for your policy. The amount will be less than the face amount the policy would pay upon your death. (For example, you might agree to accept a $75,000 cash payment for a $100,000 policy.)
The viatical settlement provider buying your policy:
1. becomes the new owner of your policy,
2. names the beneficiary,
3. collects the full death benefit when you die,
4. begins paying premiums on the policy, and
5. may sell your policy again.
There are four basic phases required to complete a viatical transaction.
Phase 1- Qualifying to sell your policy (underwriting)
The viatical settlement provider will need information about you before making an offer. Usually it will take some preliminary information from you over the phone and send you this paperwork to sign:
1. a medical release form so the viatical settlement provider can get and review your medical records
2. an authorization form to contact your insurance company to confirm benefit, premium, and ownership of your policy.
To avoid delays, it's important that you give complete and accurate information about your medical history.
If you apply with more than one viatical settlement provider, each will contact your doctor for medical records and your insurance company for policy information.
Phase 2-Calculating the offer
The viatical settlement provider uses the information it gets in the underwriting phase to make an offer. To develop an offer, a viatical settlement provider takes into account various factors including:
1. Estimated life expectancy and medical condition of the insured. Generally, the shorter the life expectancy of the insured, the more the viatical settlement provider will offer for the policy.
2. The amount of life insurance coverage.
3. Loans or advances, if any, previously taken against the policy.
4. Amount of premiums necessary to keep the life insurance policy in force.
5. The rating of the issuing insurance company.
6. Prevailing interest rates.
7. State laws, if any, that require a minimum payment.
Phase 3-Closing the agreement
1. If you accept an offer, a closing package is forwarded to you, the seller, for approval and signature. Closing documents typically include an offer letter, a viatical settlement contract, and the forms the insurance company needs to transfer ownership of the policy to the viatical settlement provider.
2. The closing documents are then returned to the viatical settlement provider for its signature.
3. The viatical settlement provider will put the cash payment owed to you in escrow, if required, and send the signed insurance change forms to the insurance company to record the change.
Phase 4-Receiving the payment
Once the insurance company notifies the viatical settlement provider that the changes on the life insurance policy have been recorded, the payment is released to you, the seller, within two business days.
In many states, you may have the right to change your mind about the settlement AFTER you receive the money, provided you return all the money. Typically the law allows 15 days to review your settlement arrangement.
Step 4, Know your rights
State laws
Many states have laws that provide important consumer protections. You'll want to contact your state insurance department to see which of the following consumer protections your state requires. Determine if:
1. A viatical settlement broker or viatical settlement provider arranging viatical settlements must be licensed with your insurance department.
2. The viatical settlement provider buying your policy must keep your identity and medical history confidential unless you give written consent to tell others.
3. To protect your proceeds, the viatical settlement provider buying your policy must put your money into an escrow account with an independent party during the transfer process.
4. You have the right to change your mind about the settlement AFTER you receive the money, provided you return all the money. You have 15 days to review your settlement arrangement.
5. The new owners of your policy are limited in how often they may contact you about your health status.
Federal tax laws
Two groups of people may receive benefits from a viatical settlement without owing federal income tax:
1. persons who have been diagnosed with a terminal illness and with a life expectancy of 24 months or less and
2. certain chronically ill individuals.
If you qualify for this federal tax-free treatment, you also must use a viatical settlement provider that is licensed in the state where you live, or, in states where licensing is not required, that complies with the standards of the National Association of Insurance Commissioners' Viatical Settlements Model Act.
Remember that, as when interpreting any tax laws, it's always best to check with your own financial advisor.
Avoiding consumer fraud
1. If you're in good health and someone asks you to sell your life insurance policy, proceed with caution. Remember that viatical settlements are intended for people living with life-threatening or chronic illnesses. Contact your state insurance department for more information.
2. If you've been contacted by someone who wants you to buy a policy and then sell it immediately, you should contact your state insurance department. You may be a target for fraud.
3. If you're asked to buy a life insurance policy for the sole purpose of selling it, you may be participating in fraud.
4. If you're asked to invest in a viatical settlement, we recommend you contact your state insurance department to learn more about the issues and risks that might be involved in such an investment.
Step 5, Check with your state insurance regulator
State licensing
Find out if your state licenses viatical settlement providers and brokers. For a complete list of authorized viatical settlement providers, brokers, and their representatives, call the Department of Insurance.
Seller checklist
Before you sell your policy be sure you know the answers to these questions.
Evaluating your needs
1. Do you still need life insurance?
2. Do you have dependents who might rely on your life insurance benefits should anything happen to you?
3. If you don't need life insurance protection now, what are the chances you'll need it in the future?
Current policy benefits
1. Can you borrow from the cash value?
2. Can you cancel the policy for its current cash value?
3. Can you use the cash value as collateral to get a loan from a financial institution?
4. Do you have an accelerated death benefit feature?
Taxes and other financial considerations
1. Is the money you get from selling the policy taxable?
2. Will the money you get from selling the policy affect your eligibility for government benefits?
3. Do you need the advice of a tax or estate planning specialist before you decide to sell your policy?
4. If you sell your policy, can any of your creditors claim the money?
Understanding the process
1. If you sell your policy, who will be the legal owner?
2. Is the viatical settlement provider buying your policy licensed?
3. If you sell your policy, how will the value you get be calculated? What interest rate will be used?
4. If you sell your policy but then change your mind, can you get your money back?
5. Will investors have specific information about you, your family or your health status?
6. How are fees or commissions paid to the viatical settlement broker or provider?
Protections in your state
Contact your state insurance department to find out if there are any laws governing viatical settlements.
N.M. Admin. Code § 13.9.15.18