Your Life Insurance Policy – Your Hidden Asset
500,000 seniors a year will “lapse” their life insurance policies, meaning they stop making the premium payments and let them go. Another 2 million will surrender, or “cash out” their life insurance policies. They walk away with very little or nothing. The reason this happens is that the policy is no longer wanted, no longer needed, or no longer affordable, and people do not know there is another option. The good news is, there is – a life insurance settlement.
Let’s start from the beginning:
Ever since Benjamin Franklin helped start the first life insurance company in the U.S. in 1759, life insurance has been a key part of our lives and financial planning. Today, the U.S. is the leading life insurance premium writing country in the world with over 290 million life insurance policies in force amounting to approximately $20.3 trillion in face value. Just policyholders 65 and older have 38 million policies in force with a face value of more than $3 trillion. The Life Insurance Settlements Association’s (LISA) own research shows that Americans 65 or older leave over $100 billion in benefits on the table each year by lapsing or surrendering their life insurance policies.
Simply put, a life insurance settlement is the sale of a life insurance policy to a third party (usually an investor group) who gives the client cash for the policy. In turn, the buyer becomes the new owner of the policy, pays the premiums, and receives the death benefit when the policy matures. The client benefits from receiving substantially more than the surrender value for the policy. Last year, according to a LISA study, clients received 5 times the cash surrender value by selling the policy. Even term policies have value.
Yet, the vast majority of people do not know about life insurance settlements, including some insurance and financial advisors. Let’s answer some common questions:
What type of policies can be sold?
All types of life insurance policies can be sold, including universal life, whole life, term, second-to-die, and group policies. Universal life is the most common type of policy sold, followed by term and then whole life.
How can term policies be sold, they have an end date?
The key is that the policy must be convertible into a more permanent type of policy like universal or whole life. And, the policy cannot be past the conversion deadline. Many term policies, if convertible, have conversion deadlines based upon the age of the client, or on the length of time, the client has been insured. Some have conversion deadlines corresponding to the end of the policy term. So call your insurance agent or insurance company. They will tell you when your conversion deadline is. Looking into a life insurance settlement before the conversion deadline is important. Ideally, starting 6 months ahead of the deadline allows plenty of time to complete the settlement. Sometimes, even a non-convertible term can be sold, but that is not very common.
What size does my policy have to be to sell it?
Typically, buyers will look at policies of $100,000 in face value, and in some rarer instances, even below $100,000.
Why would I want to sell my policy?
As mentioned earlier, most people sell their policy because they no longer want or need coverage. Many times, clients purchased the policy 10, 15, or 20 years ago, but now, the reason they originally purchased the policy is no longer relevant. The policy is simply not needed any longer. Some examples are: a client has retired and no longer needs the income replacement; their home is paid off; a spouse has passed away; or a client sold their business.
Policies also become unwanted: a term policy that is about to expire; some universal life policies are becoming unaffordable as they mature; cash values in the policies have been depleted; or due to a change in finances, policies become too expensive to maintain.
What can I do with the money I receive?
Short answer – anything! Selling your life insurance policy can be a good way to bolster savings, increase Retirement income, make home modifications, take that long-awaited vacation, pay for assisted living, memory care, or home care, pay down debt – anything!
What age do I need to be to qualify?
The good news is there is no qualifying age. Age can be very relevant in determining what an investor will offer on a policy. Generally, life insurance settlements are best for clients age 65 or older, but that is just a guideline. Each client’s situation is unique and personal.
I’ve never heard of a life insurance settlement. Are they legal?
Believe it or not, a U.S. Supreme Court decision in 1911 (Grigsby v. Russell) paved the legal foundation for life insurance settlements. So, life insurance settlements are not illegal, but what about being regulated? The life insurance settlement industry is highly regulated by Departments of Insurance across the country. The National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL) have been very involved in crafting model language and disclosure notices to protect consumers, which have been adopted by the majority of states.
The Insurance Studies Institute found 90% of seniors surveyed would have considered a life insurance settlement, had they known about them. A “hidden asset” that a client was going to lapse and collect nothing, turns into “found money”. Life insurance settlements are not appropriate for everyone. We suggest you consult your advisors before considering a life insurance settlement. But if all of the alternatives have been considered, and the decision has been made to lapse or surrender your life insurance policy, a life insurance settlement can offer you significantly greater value.
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