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Taking Care of Mom and Dad: Life Settlements

There's a trend today among some retirees that isn't a smart thing to do: cashing out a life insurance policy through a so-called life settlement. This is when a company (the "life settlement" company -- not the insurance company) persuades financially secure seniors to sell their life insurance policies.

The seller gets a payout greater than the cash value of the policy; the buyer keeps paying the premiums and eventually collects on the insurance payout when the seller dies.

Historically, terminally ill people have used this strategy (sometimes also called a viatical settlement) as a way to access much-needed funds for medical needs, but more retirees are doing it because they don't have other assets to meet immediate financial needs should they arise or they don't fully understand the importance of maintaining the full value of their life insurance.

In some cases, cashing out a plan may make sense, but your parents should be careful. The industry has been marred by scams. Only a handful of legitimate settlement companies exist; and fraudulent ones pop up to abuse vulnerable seniors, exaggerating the benefits and cheating people out of the protections their policies were meant to provide.

Your parents should sell their insurance policy only as a last resort. Although they may think they're getting a great deal by receiving thousands more than the cash value of the policy, they may not consider the tax implications of policy sales. And, even though your parents may think they don't need a policy anymore because you and your siblings are grown and educated, they should understand the benefits a policy provides when someone dies.

If your parents want to cut their premiums, selling the policy isn't the answer. They can reduce the death benefit to lower the premium. Or, they can use one of the nonforfeiture options available from all insurance companies. If possible, they can trade a portion of their permanent policy in for paid-up term life insurance or convert it into an annuity.

Before your parents decide to sell their policy, they should seek advice from a certified public account who knows the tax implications. And, as a son or daughter you'll want to stay on top of this endeavor. Con artists in the settlement business can beguile the smartest of elders. You don't want to learn after-the-fact, that the policy has been sold to a shady company, April 16th arrives and your mom owes thousands of dollars (that she doesn't have) in taxes.

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