You are entitled to all of the information to make the right decision.
We are proud to launch the Financial Hotline where you can send us any questions pertaining to financial planning and we will answer you by providing you all of the facts. Whether you just need some information or you want to check a product recommendation or the advice of an advisor, we are there to support you. This service to consumers have become necessary in view of the position of the financial industry in regards to Viatical Settlement where insurers are asking and threatening advisors to lie to you in regards of the value of your life policies. Sadly advisors are not standing up for your rights and therefore their advice cannot be trusted anymore.
We will answer only questions sent by email at email@example.com.
I am doing some research on viatical settlements. A colleague of mine is interested in selling his insurance policy to a third party. I came across an article you wrote and I surmised that you conduct yourself with much knowledge and intergrity. I was wondering if you, in fact, do accept to do this type of transaction. If you do not, would you be willing to recommend anyone reliable that we may contact here in Montreal. Either way, I would greatly appreciate any information that you could provide for us. You may forward or contact me through this personal email. If my colleague would like to do a life settlement on a $650,000 term policy to 80 years with premium payments of less than $100/month, paid into for approximately 20 years already, what ballpark amount may he expect as an offer? In other words, what would be a reasonable offer? Other considerations would be his age and health. He is 46 years old, but he has several serious health issues. He knows his life expectancy is not great at all. Finally are life settlement taxable?
First, I am a consumer advocate and my role is to fight for the rights of consumers and this include the right to use their life insurance to meet their financial needs which includes the option of a Viatical Settlement. However I am not involved in offering Viatical Settlement.
In my answer to your question, I will use new terminology to move away from the negative meanings that the financial industry has assigned to terms such as Viatical Settlement preventing a fair discussion on this topic.
There are 2 types of life settlements which I will call the American life settlement (ALS) and the Canadian life settlement (CLS). The ALS involves the transfer of ownership to a third party in exchange for a lump sum settlement with this lump sum being subject to taxation. For the CLS, there is no transfer of ownership since the policy is collaterally assigned in exchange for a loan settlement and therefore the proceeds of the CLS are tax free.
Example: let’s assume that the T100 for a client age 87 has a $60,000 ACB and the policy is sold for $100,000 under an ALS. In this example, the proceeds received above the ACB of $60,000 would be taxable and the original owner would have to include $40,000 in this income. At death, the estate will receive nothing and the death benefit will be going to the new owner. If this was a CLS, the $100,000 would be paid tax free and nothing would change on the policy except the recording of an assignment in favor of the lender. At death, the loan would be repaid by the death benefit and what remains of the death benefit after this would be payable to the estate or beneficiaries.
As a result, from a consumer perspective there are not many advantages to a ALS. This is why we recommend a CLS.
In reference to your friend who has a T100 of 650,000 issued at age 26 and he is now 46, to buy the same coverage today as a T100, he would have to pay 600 monthly versus the 100 monthly he is currently paying. This is what we call the replacement value. Mathematically, this would indicate that this T100 has a fair market value (FMV) of about $120,000. This is a ball park figure only and can change based on variables used such as the discounted rate. This is based on no change of health. Now you indicated that your friend health has changed dramatically. Not knowing his new life expectancy, I can't tell how it would impact the FMV of the policy by increasing it.
Please note you should find out what is the adjusted cost base of the policy as this would tell you how much tax will need to be paid if you sell the policy. For example if the transfer price is 120,000 and the ACB is 100,000, 20,000 will need to be included in income. Then you compare this against receiving an amount received tax free as a loan where interest will accrue against the death benefit.
Should you be concerned with fraud associated with viatical settlement? Absolutely not!!! This is fear mongering at its worst. Fraud usually surfaces with any types of securitization of an asset. The best example of this is mortgages. When mortgages where securitized to be sold as an investment, fraud became so prevalent that it almost destroyed the global economy. Does that mean you don’t get a mortgage? No. You should only be concerned with fraud if you intend to invest in a fund that invests into viatical settlements. If you are simply selling your life policy whether or not the company that buys your life policy deceives future investors will have no impact on you.
Disclaimer: We will not offer you advice. We do not sell any financial products and we are not licensed to do so. We only provide you with the information that will allow you “the consumer” to make the right decision for you. We are not associated with any insurers nor do we accept any financial support from anyone. Therefore this service is entirely objective and free of any conflict of interest.