Many people wouldn’t think that life insurance and green living have anything in common. However, the two are much more closely intertwined than you would think. In 1999, Plymouth State University wrote a paper titled Global Climate Change and its Implications for Life Insurance and Health Organizations.
The authors concluded that climate change poses a number of risks to life insurance policies:
“Climate change poses several risks to the life insurance and health care industries, but also many opportunities to improve competitiveness and reduce costs. It might be argued that public health infrastructure in the U.S. is sufficient to stave off significant mortality losses due to climate changes. Climate alterations, however, could affect growth opportunities for life insurers in overseas markets with debt-related constraints on public health and infrastructure. In several ways, U.S. life insurance companies stand to benefit from larger efforts to limit climate change.”
This raises a couple of key questions:
- How will your life insurance policy change in light of problems to the environment?
- What steps can we take to stall climate change to help minimize actuarial risks and keep premiums in check?
These questions need to be answered as climate risks worsen.
The Plight of Climate Change on Life Insurance Policies
The risk of climate change needs to be taken very seriously, as it plays an important role in life insurance underwriting. The best life insurance plans take this into consideration.
You’ve probably seen advertisements on TV or in the newspaper with senior citizens talking about how happy they are after receiving cash from selling their life insurance policy. If you’re over 65 and have a policy with a face value of at least $100,000, should you sell your policy for quick cash too?
These ads don’t discuss climate change’s impact on the markets. However, that risk is something that cannot be ignored. This will depend on your health, age, the type of life insurance you have and why you want to sell the policy. Before dipping your toe into the life settlement waters, there are certain things you need to know.
How Life Settlements Work
A life settlement is the sale of life insurance policy to a third party with no insurable interest. As the policyholder, you get more cash than you would get if you surrendered or let the policy lapse.
The purchasing party assumes responsibility for paying all future premiums to keep the policy in force. When the insured person dies, the purchaser receives the policy’s face amount.
Who Might Buy Your Policy?
Licensed firms known as life settlement companies purchase life insurance policies directly from policy owners. Life settlement providers like Mason Finance are regulated by state laws making them the safest place where you can trade your life insurance policy.
You can also sell your policy through a life insurance settlement broker – a company that finds a buyer for your policy. While brokers eliminate the tough and time-consuming task of finding a suitable buyer, they collect a high commission – almost 30% of the life settlement proceeds.
You need to keep in mind that some policies are more in line with climate activists concerns than others. They will be more likely to purchase a policy from a company that aligns with their views, provided it has a track record for promoting sustainable initiatives.
What to Watch Out For
While life settlements provide immediate liquidity for an unwanted policy, there are several potential disadvantages. Money received from the sale of the policy may negate benefits enjoyed by the policyholder. It may jeopardize the benefits from Medicaid and other types of low-income assistance that the policy owner enjoys. Another drawback of a life settlement is that you forfeit a large sum of money that could be left to your heirs. Last but certainly not least, the proceeds from the life settlement could be claimed by creditors if you have large amounts of debt.
Keep in mind that climate change may have created a worse outcome for these people in the future. They may need a policy with a higher guarantee to account for that.
Do Your Homework
If you decide to trade your policy for life settlement, do thorough research. Check with your local insurance department to make sure that you’re dealing with licensed life settlement brokers and providers. Also, make sure that you understand the provisions within your state’s life settlement acts. Many states have adopted the National Conference of Insurance Legislators or the National Association of Insurance Commissioners model standards. With these standards, policy owners can return proceeds from the life settlements and reinstate their life insurance policy within 30 to 60 days.
It’s also important that you consult with a financial or tax adviser. The expert will help you better understand all the implications for you and your heirs.
Make sure the tax expert understands the importance of sustainability. They will take environmental concerns into account when they do their due diligence.
Tax Implications of Selling Your Policy
Selling your policy carries tax implications. Life insurance benefits are tax-free to beneficiaries. However, when you receive life settlement proceeds, the difference you pay in premiums and the cash value is subject to ordinary income taxes. Additionally, the purchaser of the policy also owes tax on death benefit – another factor that reduces the offer price.
Consider the Implications of Climate Change on Your Life Insurance Policy
Many factors affect the value of life insurance policies. Climate change is one of them. You may not think climate change has much to do with it, but PSU’s research shows it is a huge liability.