Life Insurance and Aging Parents - Three Things You Should Know
You've just gotten off the phone, or out of the doctor's office, with Mom or Dad. You knew they were getting on in years (hard to miss that), but now they've got cancer or a heart condition, that is severely lowering their life expectancy. They have a life insurance policy that is costing a lot of money in premiums, but would also provide a lot of money to help with burial expenses, and other financial issues. Should you keep it, or cash it in?
Here are three things to consider:
- Time in Force: Insurance can only be purchased by people who have an "insurable interest" in the insured party's survival. This protects us from just anyone taking out policies on other people, but insurance can be transferred to a life settlement investor as long as it was purchased legitimately, and as long as it meets the minimum time in force to meet the stated "no contest" period. This is usually two years, but can be longer.
- Policy Type: Whole life, universal life and variable universal life insurance, all of which are considered "permanent" insurance, can be settled (cashed in), if necessary. Term insurance can also be settled, but only if it's first converted to a permanent policy.
- Generally, settlements that are in excess of the premiums that were paid are considered long-term capital gains and can be taxed as such.
What does all this mean to you and Mom or Dad? You'll need to sit down with an accountant or attorney who specializes in laws regarding the elderly, and figure out if settling a life insurance policy prematurely will be more of a benefit than letting the policy run its course.