Cash in Life Insurance While Still Alive
Many seniors today are looking into selling their life insurance policy for cash. This is because they are living longer, and the premiums on their life insurance policy are becoming unaffordable, or their needs for the life insurance have changed.
According to an independent study, 85% of universal life insurance policies do not end up paying the death benefit either due to lapsing from non-payment, or surrendering the policy for the cash value.
There’s another way to cash in life insurance while still alive, and that’s by selling the policy to a 3rd party investor. This type of transaction is known as a life settlement, and is now a multi billion dollar industry with many institutional investors. Our job as life settlement brokers is to bring your case to a wide variety of investors to find the highest bidder.
If you’re interested in finding out how much your policy might be worth in the life settlement market, take 30 seconds to fill out the free appraisal request, and we’ll get back to you promptly with some numbers to consider.
If those numbers sound interesting to you, we can look at bringing your case to market to have investors make offers. There’s no obligation to accept an offer, but as long as your expectations are reasonable, it’s always worth trying the market to see what kind of offers we get.
Basic Requirements
Basic requirements to apply for a life settlement are the insured is age 65+ and the policy has a death benefit of $100k+. Universal life policies are the most commonly purchased, but we can also sell term policies as long as they are still convertible.
The traditional method to cash in life insurance while still living is to surrender the policy for the cash value account. Your annual statement will provide a surrender value on the policy, and you can always call your carrier to find out the latest balance.
If you have a significant amount of cash value in your policy, such as 50% of the death benefit, unless you have a terminal diagnosis, we probably won’t be able to sell it. This is because an investor would have to offer more than your surrender value for a settlement to even make sense. If you own a $1MM life insurance policy and have a $500k surrender value, it’s going to be really difficult to find an investor who wants to pay more than $500k for a policy that might not pay out or another 10 years, so in this case your best option to cash in your policy is to take the surrender value.
Life insurance can provide much-needed cash for loved ones you leave behind when you die. That financial safety net for those who depend on you for support is the primary reason to buy a policy. But life insurance also can provide cash for you while you’re living—that is, if you have a cash value life insurance policy. (1)
Want to Know About Cashing Out Life Insurance While Alive
Realistically, most people don’t have that much cash value in their policy as they tend to use this money to cover some or all of their premiums for a number of years in retirement. On a $1MM policy what might be more likely is that someone has $80k in the cash value account. If they decide to cash in by surrendering it they would only get about $80k, but if they decide to sell it, perhaps we can get $150k, or $500k+. And what’s even more likely is that someone has a $12k surrender value and their next annual premium is $40k, so they don’t have enough to cover the premium. We should be able to get them quite a bit more in a life settlement if the numbers look right, so the better option here would be to sell it to cash in.
When there is some cash value in a policy, the investor will take this into account on their calculations because they too can use that money to cover future premiums. While many wait until they have no cash left to look into the settlement market, selling a policy with some cash now may be a better option. One case I worked on was a $1MM life insurance policy on a 97 year old. He had $130k in cash value, but next year's premium was going to be $125k. He could have held onto the policy for another year, but because he decided to sell it now, that increased the value of his settlement significantly. Despite his age, he was in fairly good health, and outlived the year in which he could have held onto the policy. By selling it sooner it yielded him a larger settlement as the investor used that cash to cover premiums instead of paying out of pocket.
Over the years, many of us have purchased life insurance — whether it was to protect family or a key employee or as a vehicle to provide liquidity for estate taxes. As life evolves and laws change, it is essential to review whether your policy has outlived its intended purpose. The old strategy of “buy and hold” no longer applies to the ever-changing world, especially with the development of a sophisticated and robust buyers’ market for life insurance policies. It may be prudent to consider selling your policy. (2)
Take Into Account the Cost of Future Premiums
Some policy owners are hoping their life insurance policy is some kind of lottery ticket, and that an investor will pay nearly the full death benefit to buy it, but the math on that doesn’t really add up. When you’re reviewing life settlement offers, it’s important to take into account the cost of future premiums.
When an investor reviews a life insurance policy, first they look at the cost of insurance to determine if the policy is priced well or not. Some people pay significantly more for the same amount of coverage, and this can be based on a number of factors including the carrier, how long the policy has been in force, the type of contract, and the health rating of the insured at the time the contract was issued.
The next thing they look at is medical records. An underwriter will review the recent health concerns on the insured and compare it with mortality tables to determine an approximate life expectancy. If they determine that the insured is likely to live another 10 years, then they know they will likely have to pay the premiums on the policy for another 10 years. If the premiums are $20k a year, that means they’ll likely pay $200k in premiums. If the death benefit on that policy is $250k, then there’s not enough money to also pay a settlement while making a return on investment. The time value of money is also considered, so loaning out $200k over 10 years to make $25k is not beneficial to an investor. On the other hand, if the policy has a $500k death benefit and costs $200k in premiums, then there’s enough money to pay both a settlement plus future premiums. Perhaps they offer somewhere around $50k - $70k for this policy.
When you consider this amount, it may feel quite small in comparison to $500k, but again you have to factor in the future premiums that will be owed on this policy.
If you keep the policy, you will pay another $20k this year, and all the years after. If you take the $70k and factor in the $20k that you will save by not paying the premium, then your current savings will increase by $90k by comparison. Keep adding that $20k over the next 10 years, and your $70k settlement looks more like $270k.
If you keep the policy, you keep paying $20k a year, and if you do pass in 10 years, the $500k death benefit will be paid to your beneficiaries. In this case you will have spent $200k more starting today to make $300k in profit over 10 years, not $500k profit. The $300k is still a pretty good return, but when you consider taking the settlement instead that means you have $270k more in savings than you would have if you kept paying. When you consider all of these numbers this really starts to level the playing field, and the $70k starts to look like a pretty good offer, especially if the $20k is stretching your budget or perhaps that money is better invested elsewhere at this point.
Use the Proceeds However You Wish!
The proceeds from a life settlement can be used however you wish. For many, it may add to their retirement fund, and they may invest the money into their current investments. Perhaps they are able to grow their proceeds to an amount similar to the death benefit over the next 10 years if they invest it properly.
Some may use it to fund long term care needs, while others use it to take a vacation, fix the roof, buy a new car, or distribute wealth while they are still living. A settlement can easily help with the down payment on a vacation home. Make that vacation home a rental property, and perhaps you’re making a steady retirement income now while also enjoying it with your family. The opportunities are endless. If you keep the policy your money will be tied up in it until you pass, and hopefully you can afford to keep up with it. There’s no doubt, the death benefit will leave a legacy, but perhaps there’s other ways you can leave a legacy that doesn't strain your budget so much and that you can start enjoying today.
Outline the Process
If you decide you’re happy with the numbers, the deal goes into a contract escrow phase where a life settlement provider does legal due diligence to protect the seller and their family as well as the investor. The investor wants to make sure they own the policy free and clear with no surprises, so the policy can’t be subject to collection from creditors, bankruptcies, divorce decrees, etc. The department of insurance also wants to make sure that the seller is of sound mind and that their beneficiaries are not caught off guard when there is no death benefit. Once these protections are satisfied, then the change of ownership and beneficiary forms are submitted to the carrier, and once they have written confirmation that these changes have been made they will release your settlement funds to you via wire transfer or live check.
Cash in Term Life Insurance While Still Living
If you own a term policy, typically there’s no cash surrender value from the carrier, but if we convert the policy into permanent life insurance, an investor might be interested in purchasing that. Most term policies have a conversion privilege which allows you to turn your term policy into a permanent policy such as a universal life plan. In essence, you’ve already qualified for the policy when you first applied, and whatever health rating you received then will be applied to your new, permanent policy.
To find out if your term policy is still convertible, you can review your original contract details to find the conversion deadline, or you can simply call your carrier and ask. We also get many questions about life settlement vs viatical settlement. Check out our article if you have any questions!
If it is convertible, you don’t want to convert it yourself. Hopefully you have some time before the deadline, but if the deadline is in just a few days, let us know and what we’ll do is submit an application to avoid missing the deadline, but we won’t finalize it until we have an offer on it and start the contract.
The investor will be reviewing an illustration on the new policy in order to determine if an investment makes sense. The premiums on the new policy will be significantly more than your term policy, so whatever you're currently paying does not really have much effect on the settlement. If we get to the offer acceptance phase, the investor will most likely transfer the term policy and then convert it, but every case is different.
Term insurance is the cheapest way to buy the most insurance, but less than 5% of term policies end up paying the death benefit. Most people that buy term insurance are likely covering children or debt, and this is a great way to do it. If there’s a tragic accident or unexpected terminal illness, it can be extremely helpful to your loved ones to have financial stability should something happen. And most people realize they’re not likely to get a death benefit out of their policy, so it’s unexpected when they find out they might be able to get some money back if they sell their term policy.
Universal Life Policies
For universal life policies, these are permanent life insurance policies that pay a death benefit no matter how long you live, so people are expecting that the death benefit will eventually be paid. When people end up living a longer life they are surprised to find it challenging to keep their policy in force. This is because universal life insurance policies have an increasing cost of insurance. The older you get, the more expensive your premiums are, and most policies are structured in a way where you accumulate cash value over time to help offset these future costs. Also, these costs and interest rates are not typically guaranteed. In some cases policies under performed, and carriers are having to increase premiums to keep the policy in force for the same length of time. In other scenarios, seniors are retired and decide to skip paying their premiums for a few years, using their cash value to cover their minimum costs. Depending on how much they have accumulated and how old they are, they may find their cash value balance drops rapidly, and when it reaches nearly $0 they are surprised to get a premium notice that is significantly larger than they’ve ever paid before.
In a lot of ways, the cash value account allows for seniors to guess how long they have to live. They could fund premiums to age 85, meaning they’re paying just enough to keep their policy in force until age 85, but if they live to age 86 all the sudden then get hit with a large bill they may not be able to afford. This is when doing a life settlement may be their only option to recoup some of their investment, but as I mentioned earlier it may be better to look into sooner.
In other cases, needs have changed since they bought the policy. Perhaps they took it out before 2008 when there were large inheritance taxes, so funding your legacy through a life insurance policy was a good way to avoid estate taxes. Maybe the policy was to protect a spouse or children, and the children are all grown up and there’s plenty of other assets to leave behind. Continuing to pay expensive premiums on your life insurance may not be necessary anymore, and perhaps that money is better spent elsewhere. Before you take the surrender value on your policy, get a free appraisal and find out if it might be worth a lot more to sell it. If you still have questions, check out our article on liquidity in life insurance.
Zack Taylor
4 years in life settlements