Seniors look to life insurance for fast cash

More and more senior citizens are seeking ways to make their leisure years more comfortable -- or simply to make ends meet. Many are looking to liquidate or tap at least a portion of an asset that historically has gone untouched.

For example, two seniors asked recently if it were preferable to take a life settlement on their life insurance policy or to pursue a reverse mortgage. The answer depends on a variety of individual preferences, plus a person's age, health, policy value, estate needs, home value and future housing needs.

A life settlement is the sale of an existing life insurance policy for an amount greater than the cash surrender value. Insurance policies are a saleable asset like a stock or bond. It is a financial option for seniors 65 and older who no longer need or want their current insurance policy.

Who would be a prime candidate for a life settlement? Typically, a surviving spouse whose children are now financially secure, a company that no longer needs to insure a key executive or seniors who are no longer able to pay the policy's premiums.

Reverse mortgages were created as a safety or security net for people who wanted to stay in their homes and generate income. It has now become more of a valuable strategic planning tool for seniors as savvy borrowers use it to offset investment losses, etc.

Life settlement was created by wealthy executives as a secondary market for multimillion-dollar company insurance policies, according to Eric Bachman, CEO of Golden Gateway Financial, which facilitates both reverse mortgages and life settlements. That "product of privilege" has now moved towards a more mainstream product for anyone who has outlived their policy. The two began as products on opposite ends of the market, but have both moved toward the middle.

Deloitte Consulting was one of several companies to determine that the best return on a life insurance policy was to allow the policy to run to its full term. The estate, typically the survivor's spouse, children, other family members or charity, received the funds from the policy. However, that common plan does little to solve an immediate need or want. But be careful. There are an increasing number of states that have outlawed the practice of life settlements on a policy initiated by investors, known as STOLI (stranger originated life insurance).

A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. Funds obtained from the reverse mortgage are tax-free. The Federal Housing Administration, a component of the U.S. Department of Housing and Urban Development, insures the nation's most popular reverse mortgage known as the Home Equity Conversion Mortgage, or HECM. ...CONTINUED

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