Well might the reader understand that the credit crunch has landed Americans on a fixed income in an especially sorry state, especially when the fed puts a freeze on their Social Security income. For the afflicted geriatrics, a heretofore stigmatized source of financial relief is drawing greater popularity in recent months: many seniors possess some life insurance and can effect a “senior settlement.” In a life insurance settlement, the policyholder sells his policy in exchange for a portion of the death benefit. He gets to make use of some money when he needs it, and when the seller dies, the buyer is assured of a death benefit in excess of the amount he paid for the settlement.
Alas, state governments are also hard pressed for cash at present, and none of them budgeted and saved as carefully as our insured seniors did. In reaction to the rising popularity of life insurance settlements, government officials have dipped their hands in even deeper. April legislation raised taxes on sales of life insurance settlements and declared, moreover, that whereas life insurance death benefits are normally protected from taxation, the death benefit shall be taxed for the buyer of a settlement.
Thus, both buyer and seller are left with less incentive to enact their business, but the policyholder has scanty alternative. If cash is already short, his policy risks lapsing because of nonpayment. Surrender is preferable to lapse, but it is not likely to recover as much capital as settling would do.
This matter bears effects on a grander scale, as well: the imposed dis-incentive impairs the life insurance industry’s—an industry which asserts never to have defaulted on a legitimate claim—ability to adapt itself to the upset economy in a time of financial straits. It is hard to drum up sympathy for the industry, though. For the past fifteen years (or perhaps since the days of the robber barons) big business has been a popular target.
Regrettably, the imbroglio of legislation makes it nigh impossible for any but specialists to discern exactly how legal measures such as those mentioned here harm them. Policyholders who wish to sell their life insurance policies for a settlement are advised to consult a tax advisor.
