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Using Life Insurance to Pay for Medical Expenses

Posted By Dr. Andrea Brockman and Dr. Vincent DiLorenzo of Lifetime Horizons , Wednesday, June 15, 2016
Adding to a patient’s stress of the diagnosis and treatment, the costs of uncovered healthcare combined with a loss of income can quickly drain a family’s resources. When available, a life insurance policy can provide the needed financial relief through a process known as a life settlement. The article below, written by Dr. Andrea Brockman and Dr. Vincent DiLorenzo of Lifetime Horizons, explains the basics of life settlements and when that option would be appropriate.

Life Settlements Defined
A life settlement is a financial transaction that enables qualified life insurance policy owners (individual, company, Trust, or charity) to receive a cash advance on their life insurance coverage by selling it to a state licensed financial institution - a bank, hedge fund, pension plan – known as a life settlement provider. It’s a little known fact that, like stocks, bonds, art, or antiques, life insurance is a financial asset that can be bought and sold by the policyowner. Rather than cashing in a policy for its cash surrender value (CSV), it may be leveraged via a life settlement for its fair market value (paid by the investor) which typically yields 3-5 times more than the CSV offered by the insurance company. The purchaser handles all the recurring premium payments and becomes the new owner and beneficiary of the policy, receiving the death benefit upon passing of the insured.

Is Getting Rid of a Life Insurance Policy the Right Choice?
When personal or business needs change, sometimes a life insurance policy no longer serves its original purpose. Below are examples of common scenarios in which existing insurance policies may no longer be necessary:
•    Changes in circumstances –there’s a need to raise cash for immediate expenses
•    The insured’s heirs are financially independent – student loans are paid off
•    Estate tax law changes- Policies purchased to cover estate taxes that are no longer due after recent estate and gift tax law changes.
•    Insured outlived the beneficiary – Policy is no longer needed.
•    Multiple policies – Where not all are necessary.
•    Premiums too expensive –
             - Term Conversion Option Due – Most people let their policy lapse; however, if exercised, the policy may be valued for significant cash in a life settlement.
             - Poorly Performing – UL policies tied to the stock market may eat into cash value or require additional premiums during a down market.
             - Joint or Survivorship – Surviving spouse may not be able to afford the premiums or need the coverage due to change in circumstances.
•    Key Man Retires – Company or split dollar policies that do not need to continue to pay premiums due to key man retirement or change in firms.

Parameters for Life Settlements
Not all life insurance policies will qualify or benefit from life settlements. The factors below are indicators of the type of policy that may be eligible for a life settlement:
•    The insured has an in-force (owned for at least two years) qualified policy with a death benefit of at least $50,000.00 - Universal, Whole life, Convertible Term, Joint, or Group
•    The policy owner must have an insurable interest - Family member, business, or trust owned.  
•    The insured has a life expectancy of 15 years or less
•    Insured is verifiably mentally competent to enter into a life settlement transaction or have a valid Durable Power of Attorney.
•    Beneficiaries must agree in writing to the transaction

The primary benefit of life settlements is the opportunity to put money in motion for needed treatment, living expenses, or desires. When considering a life settlement, other options should be explored and suitability must be established. The policy owner and the insured are strongly advised to seek legal and professional tax advice prior to accepting any life settlement offers. If your patients are considering a life settlement or believe they may have a policy that may no longer be necessary, we can assist them, at no cost, in reviewing whether a life settlement may be a good option. They may call Lifetime Horizons at 800-430-8849 to confidentially speak with one of our life settlement experts regarding their situation.

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