Term policy owners are starting to ask - can you sell term life insurance?
The question we’re addressing today is specific to people who already own a term policy rather than people looking to sell new life insurance policies, and the answer is yes, sometimes term policy owners can sell their life insurance policy to a 3rd party investor.
The transaction is known as a life settlement, and is a legal agreement to transfer the ownership of a life insurance policy to a 3rd party in exchange for a cash settlement.
What’s unique about this opportunity is that insurance is not known as being an asset, but rather protection in case something happens. But because life insurance companies also offer permanent life insurance, a policy contract that covers you for as long as you live can suddenly become an asset that might be worth something to an investor.
Now if you’re an intelligent consumer, you’ve probably figured out that life insurance isn’t really designed to be a get-rich-quick scenario. In order to get approved for a policy, an underwriter reviews mass amounts of mortality data to determine whether or not you have a strong probability of living a longer life. In other words they have determined that there’s a very low probability of you passing away during your term policy. That doesn’t make it a bad thing to have coverage, because things do happen and families and businesses can be financially devastated when there’s no coverage, but at the end of the day you’re probably not going to collect on your term policy.
So how is it, then, that an investor would want to buy a term policy?
Most term policies come with a conversion privilege. This means the insurance company will replace your term coverage with a permanent, universal life policy, without having to go through underwriting again. Because the insurance company already reviewed your health during your term policy application, they’re willing to extend permanent life insurance to you down the road, even if your health has declined.
So the first step in determining if a term policy is sell-able is finding out if your contract still has a conversion privilege. If it does, and the insured is around age 70 or older, the next step is ordering a conversion illustration on a universal life product from your insurance company.
This illustration will show us how much the converted policy will cost in the future. Universal life products are much more complex and varied than a traditional term policy, so there’s a lot of numbers that are interpreted and calculated on each conversion illustration. What surprises many consumers is that the premiums on their conversion option are significantly higher than their term policy. Again, this is because the contract is designed to cover you for life and therefore much more likely to pay a death benefit, so it costs a lot more.
If you have a term policy with a $1MM death benefit, you might be paying $3k - $5k a year in premiums, but when you go to convert that policy into a universal life policy the premiums will probably be more like $30k - $50k a year, which is a huge jump.
As a term policy owner, you have the option of converting your own coverage to a permanent policy, however having $50k a year to spend on life insurance premiums is out of most people’s cash-flow range, but an investor has deep pockets that can afford to keep it up as long as the numbers work.
So how does the life settlement market work?
If we’re looking at getting offers for a term policy, what investors need to review is both the conversion illustration, and recent medical records. Third party underwriters will review your medical records, and based on your age and ailments, they will come up with an approximate life expectancy report. These can range by a few years from one company to the next, but they allow the investor to get an idea for how many premiums they’re likely going to have to pay, and how long the investment will take to mature.
Many consumers are not expert investors, and will look at a $1MM death benefit and think it’s gotta be worth like $500k to someone. But when you start adding up the premiums, and the time value of money, if you have a strong probability of living another 17 years, and your premiums are $50k a year, the cost of premiums alone are going to be $850k. And one night think, well that’s a $150k profit, but it’s not if it took 17 years and $850k to make $150k. That’s actually a terrible investment, and someone could do a lot better in a fixed interest investment that has no risk.
So how much is that $1MM term policy worth to an investor? Realistically, if the premiums are closer to $30k, and the health is average for a 70 yr old, meaning things like high blood pressure, overweight, etc., then we might get $15k - $20k for it. Again, that seems like a huge disparity from $1MM, however, in the more probable situation, that investor is going to end up spending $500k+ over 15 or 20 years keeping that policy in-force, and every year that money is invested it needs to earn interest back for it to be a profitable investment.
On the other hand, if your health is determined to be below average, but you’re not necessarily on your deathbed, we may get more like $100k for it. And if you are facing a terminal illness that only gives you a few years left, then suddenly we might be looking at $500k! And that is a lot of money for a term product that was going in the garbage. So can you sell your term life insurance policy? Yes, you can, and it’s worth looking into it.
If you have a terminal illness, you can sell your life insurance policy to a life settlement provider. To do this, a doctor must certify that you have two years or less to live. You don’t have to pay taxes on earnings from a life settlement. You also might want to sell your policy if you outlive your retirement savings and need to pay living expenses. You’ll probably have to pay taxes on the money you earn from the sale. (1)
Back to the life settlement market as this is a complex and niche arena of large institutional investors, smaller private investors, life settlement providers, and life settlement brokers.
Some life settlement companies will advertise directly to consumers so that you might apply for an offer directly from their company. Because you have no other offers to consider, they tend to throw out a very low number at the beginning to minimize expectations, then from there perhaps the consumer might negotiate up a little and perhaps they feel happy walking away with a few thousand dollars that they didn’t have before. In many cases though, this consumer sold their policy for significantly less than it was worth, so it’s always recommended to get multiple offers for your policy before accepting one.
While there a few companies that advertise direct to consumer, the majority are not consumer facing, and strictly review cases and make offers but do not have direct contact. Managing the general public requires having a call center with staff to coach clients and collect their information. So really your best chance at getting the most exposure in the marketplace is by working with a life settlement broker who has relationships with other buyers and can give you the most exposure, and we can help.
FAQs
Can I sell my term life insurance policy?
Yes. If your term policy still has a conversion privilege or you have a terminal illness you can sell your policy to an investor.
Who can buy my term life insurance policy?
There are both institutional investors and private investors that buy policies. Work with a life settlement broker to get the most market exposure. We can help.
How do I find a buyer for my term life insurance policy?
Work with a life settlement broker to shop your policy around to different investors. We can help.
How much can I expect to receive for my term life insurance policy?
The size of a settlement is largely dependent on the health of the insured, and how much the policy will cost in the future. Converting a policy is generally very expensive and the premiums add up to the death benefit relatively quickly. Many folks in average health receive $10k - $30k for their term conversion, while other who are unhealthy may receive much more.
Are there any tax implications when selling my term life insurance policy?
While I'm not a legal tax advisor, my understanding is that the IRS looks at how much you paid into the policy versus how much you're getting. If you're making a profit on this investment then the IRS will tax what is earned over your base cost as long term capital gains. This rarely happens unless the health of the insured has rapidly declined but not terminal. Terminal cases with 2 years are less are non-taxable.
(1) References: https://www.tdi.texas.gov/pubs/consumer/cb018.html
4 years in life settlements
About the author:
I'm a life settlement advocate who became passionate about the industry when I helped my grandfather secure over 60% of his death benefit. Recently, I assisted an 81-year-old woman with $140k annual premiums by finding an investor to buy out her policy while still receiving most of her investment back.
I've also helped clients with expiring term policies receive payouts of $10k - $15k by converting to a new universal life policy. I enjoy educating both agents and clients on the potential benefits of life settlements and am always happy to provide feedback on potential cases.
Comments