Many people over 65 determine they no longer need or want the life insurance they own. Until recently, those people either took out the available cash surrender value, took a reduced amount of paid up insurance, or lapsed the coverage. If there was no surrender value, the coverage was lapsed.
There is another option which converts the policy into cash through a sale, like any other asset one sells when they have determined it is no longer useful. Un-wanted or un-needed life insurance is an asset that many institutional buyers want to own in their portfolios. It is a simple transaction. The life insurance policy is appraised, the insured’s health is appraised and an offer is made to the policy owner. The offers are typically quantified as a percentage of the policy’s face amount. For example, a $2,000,000 policy worth 9% of face value would fetch $180,000 for the owner. There may be income tax to consider on these sales (each sale is different). After the sale, the new policy owner will be responsible for all future premium payments.
Buying and selling un-needed life insurance policies is now considered mainstream. It is a noteworthy development when class action lawsuits against life insurance companies are brought by policyholders. Should you sell an un-needed or unwanted life insurance policy? Most qualified sellers want to learn about the benefits of selling their policy in the secondary market. It pays to seek the guidance of a professional when dealing with all life insurance matters. Selling un-needed life insurance in the secondary market is known as a life settlement transaction.
Interested but unsure? Ask your CPA or tax attorney about life settlements but don’t expect them to know where you will obtain the best value for your policy. They help you with the technical and any tax aspects if there is a gain. To obtain the most value for your policy, a life insurance professional with experience in this secondary market will help you navigate the market.
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 specializing in these reports.
- A detailed history and understanding of the policy owner’s current and past health.
With this information, you should get initial offers. 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.
Do you have a policy you no longer need or want, there is no downside in finding out its value.
It is important to note that life insurance is an important asset in a legacy and succession plan. There are many ways to retain a life insurance policy that you may want to consider before selling the policy. I offer an initial, complementary consultation for one hour, either in person or by phone. During that consultation, you are free to discuss anything concerning insurance and retirement issues.
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Also published on Medium.