Are you over 65 with a life insurance policy you no longer need or want? Like any other valuable asset, you can sell it for cash in the secondary market.
Until recently, policyholders let policies lapse without sufficient information about the current value of the policy. Even term policies have value but most policyholders are unaware. If you could sell an unwanted $1,000,000 term policy for 5 percent or $50,000, would you consider it before letting it lapse? A $3,000,000 policy could fetch $150,000, or more.
Term policies have value too but most policyholders are unaware of exactly what this means, for them.
Selling a policy is known as a life settlement. Essentially, you are converting your asset to cash through a sale of the policy to an interested buyer. It is just like selling any other asset one sells when they have determined it is no longer needed or wanted. It is a simple transaction. Your life insurance policy is appraised, your health is appraised and an offer is made to the policy owner if it has value to buyers. Or no offer is made, depending on the outcome of these appraisals.
Offers are typically quantified as a percentage of your policy’s face amount. For example, a $2,000,000 policy worth 9% of face value would equal $180,000 for the policyowner. There may be some income taxes to consider on these sales (each sale is different) and that is easy information to obtain. After the sale, the new policy owner will be responsible for all future premium payments.
Should you sell your policy? It pays to seek the guidance of a professional who can help you determine if it makes sense to sell and to locate the right buyers. You may want to speak with your spouse, your advisors and your heirs. This information about a life settlement transaction may help.
Interested but unsure? The best way forward is to find out what your policy may be worth. To obtain the most value for your policy, a life insurance professional with experience in this secondary market will help you navigate. Professional organizations like the American Institute of Certified Public Accountants or the AICPA offer education for consumers about these important options.
To determine a policy’s value, potential buyers need the following information:
- Policy projections including the premiums to keep the policy in-force to various ages.
- The type of policy and its terms. Some policies have no value in the secondary market because of their terms.
- The life expectancy of the policy owner which is determined by an independent, 3rd party analyst. No medical is necessary.
- A detailed history and understanding of the policy owner’s current and past health.
With this information, you can get a valuation. Typically, there is minimal value for policies owned by healthy people under the age of 70. If there are health considerations leading to a shorter life expectancy, that may change the numbers in your favor. I recently helped a 73 year old man sell a $3,000,000 policy he purchased in his late 40’s. Because of previous medical history, he received several offers. He sold the policy for 16% of face value, or a little bit more than $450,000.
There is no downside in finding out the secondary market value of any policy you may be considering lapsing or surrendering.
Life insurance is an important asset to your beneficiaries and I urge everyone to consider keeping it whenever possible. There are many ways to retain a life insurance policy and you may want to consider them before selling the policy or letting it lapse. There are hybrid arrangements in which you give up a piece of the face value in exchange for having the future premiums paid.
Are term policies eligible for sale in a life settlement?
Yes. You should be age 65 or older with some decline in health since the policy was issued. Term policies are typically bought for a temporary insurance need, unlike permanent policies where the policy owner typically has a long duration or lifetime insurance need.
Are there special requirements for selling a term insurance policy?
Most life settlement buyers want term policies that are convertible to some form of permanent insurance. Therefore, being able to control future premium obligations through a conversion is usually ideal.
When does the conversion privilege on a term policy expire?
The answer varies among different policies even issued by the same company. Some limit the conversion period to a number of years; other companies may also impose a maximum age.
When should I begin the process if a conversion is involved?
A life settlement transaction requires getting medical records, in-force illustrations, life expectancy analyses, investor pricing and the closing. In addition, a term settlement usually includes issuance of the conversion policy. Because the entire process usually takes 3 to 4 months, you should get it started at least 4 to 6 months prior to the expiration of the conversion privilege.
Can I sell part of a term policy and keep part?
Insurance companies typically do not permit a permanent policy to be split for a life settlement. It is worth exploring if they will allow partial conversions. Then, it would be possible to sell only a portion of a term policy by doing a partial conversion as part of a life settlement transaction. The remaining policy can be kept as term insurance or be converted separately.
I offer an initial, complementary consultation in person or by phone. Please email me or fill out the contact form on this page and I will contact you shortly. You can call me direct at 561-869-4500.
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Also published on Medium.