What Is The Market Value Of Your Existing, Inforce Life Insurance Policy?
By now, we have all heard stories about someone that received a significant cash payment for a life insurance policy they thought had no value.
If you are 65 or older with a life insurance policy you may not need or want any longer, you may be eligible to sell your policy in the secondary market. The secondary market for life insurance policies is nothing more than a market for unwanted life insurance policies – usually institutional investors. A good example in another industry is Carmax. They buy cars from people who don’t want them or need them anymore and they re-sell them.
The state of Florida has just made it mandatory for life insurance companies to inform Floridians that they should consult with a professional when contemplating a change:
Specifically, the amended bill requires that “a life insurer shall provide an individual life insurance policyholder with a statement informing him or her that if he or she is considering making changes in the status of his or her policy, he or she should consult with a licensed insurance or financial advisor.” This disclosure requirement must also advise the policyholder “that he or she may contact the department for more information and include a website address or offer location or manner by which the policyholder may contact the department.”
Before making the decision to sell a policy, you will be well served to talk it over with your advisors and an experienced life insurance professional who can help you evaluate your decision in the best light possible. If the policy is valuable to a 3rd party, it may also be valuable to you or your family. You will consider this value from a completely different perspective than you did as the owner of the policy, when it was once needed for income or estate protection.
Selling a life insurance policy may not appeal to everyone. For some, it simply does not pass the smell test. They don’t like the idea of someone else having an interest in their mortality. It is a perfectly reasonable position, regardless of the potential financial windfall that might exist. Selling a life insurance policy is known as a life settlement. There can be significant differences in the market value you receive in the secondary market compared to the value from the life insurance company that issued the policy. The value from the issuing company is based on the actual cash within the actual policy; its surrender value.
There may be no cash surrender value in your life insurance policy but there may be great “market value” for a life settlement company. The payment you receive in a life settlement transaction is the market value (see the recent case studies below).
With disclosure and transparency firmly in place in most states, it may be in your best interest to consider selling unwanted policies. The goal is to compare any offer you receive against the value in the policy.
Ninety percent of seniors who lapse policies without knowing about a life settlement indicated they would have considered a life settlement if they were aware of the process.
Further, 79 percent feel their advisers should have told them first.
Depending on several important factors, including age, health and the policy type, there can be significant market value which may translate into your receiving 20-30% of the policy’s face value. Many people consider lapsing or surrendering a policy because they no longer want to pay premiums for a policy they no longer need or can afford.
Before surrendering or selling a policy, talk with a life insurance professional.
The reasons to consider selling an unwanted or unneeded policy:
· Receive a higher cash payout than cash surrender value.
· Receive money for a term policy.
· Create cash to fund retirement solutions such as guaranteed income annuities, long term care insurance or life insurance with the installment payout option.
Once you thoroughly understand this option, you will likely make a better decision. The idea of selling an unwanted life insurance policy is gaining recognition but still may be unfamiliar to many policy owners.
The economics of selling a policy are often superior to the alternatives. For example, 30 years ago, Dr. Smith purchased $2,000,000 of life insurance to protect his wife and children against the loss of his $300,000 income. He was 46 when it was issued and today, at 75, his children are grown and the need for income protection is gone. With nearly $100,000 of guaranteed lifetime income from annuities, a pension and social security, Dr. Smith feels the policy is unnecessary.
With a life settlement offer of $300,000 compared against the insurance policy’s surrender value of $90,000, the decision appears to be simple in this case.
Dr. Smith essentially received a raise of $14,000 in retirement.
Unfortunately, each year there are too many people who are still unaware of this option or they fail to give proper consideration to the risks and rewards of this meaningful alternative.
- Life Insurance benefits are usually income tax-free. Some portion of a life settlement may be subject to income tax.
- Paperwork is required to transfer the ownership of the policy.
- Proceeds will benefit the buyers, typically non-family members.
When you are ready to consider selling your policy, seek out an experienced life insurance professional with access to the relevant settlement brokers who can help you interpret the offers from competing buyers. There are still many life insurance companies that are adverse to life settlements. Although I understand a company being against abusive life settlements created solely for the benefit of investors, I do not understand life insurance companies that penalize consumers and/or insurance agents for promoting their value. When organizations such as the AICPA and hundreds of esteemed estate planning law firms are on record advocating the benefits of proper life settlements, it no longer makes sense to oppose them in the right circumstances.
Life insurance is an asset with great potential value. If you own life insurance, have it reviewed. There is no downside to having your coverage reviewed along with your goals and objectives. Life insurance benefits from innovation, offering better value and lower rates across the board.
RECENT CASE STUDIES REPORTED IN THE INDUSTRY
– an 88 year old male sold a $2,500,000 John Hancock policy, which netted him $500,000 (cash surrender value was $0),
– an 88 year old male sold a $2,000,000 universal life policy for $1,110,000 (cash surrender value was $218,000),
– a 64 year old female sold a term policy for $20,100 (the face value was $250,000; she kept $50,000 for her beneficiary),
– a 72 year old man sold a $896,450 Transamerica policy for $196,476 (cash surrender value was $94,647),
– a 61 year old man sold a $400,000 Mass Mutual term policy for $220,400.
Please email me at Ted Bernstein or call me at 561-869-4500. Visit us at Life Cycle Planners in Boca Raton, Florida.
Also published on Medium.