Life insurance is an important part of any financial plan, but it is surprising to find out that most life insurance policies do not pay out a death benefit.
Selling my life insurance policy for cash can be a great way to actually get a pay-out, increase your cash flow since you no longer have to pay premiums, and you can now enjoy that money while you’re still living. This might help you to afford alternative health treatments, and improve your comfort and quality of life. Maybe you can purchase a vacation home and leave an asset instead of a death benefit, pay off debt, repair your home to increase its value, or even distribute wealth while you’re still living. There can be many benefits to selling your policy.
Term life insurance is the most common form of life insurance as it provides the most amount of coverage for the least amount of money. It’s a good planning tool in case something were to happen to the insured, but the majority of the time the insured will outlive the policy. The good news is that you might actually be able to sell your term conversion.
If you recall, during the application process you did a physical exam and a medical review. An underwriter at the insurance company reviews your health and well-being and decides whether or not they are willing to insure you, and at what cost. If you get approved, that means the underwriter reviewed actuarial data that suggested there was a very strong probability of you living beyond the term, and therefore it was determined it was very unlikely that they would ever have to pay the death benefit.
Well, that’s just term insurance, you might think, and there are permanent life insurance products like universal life policies that will cover you for as long as you live, so you can’t outlive the coverage. And while this is true, you might be surprised to find that only around 15% of these policies actually end up paying the death benefit. The other 85% of policies are either surrendered for their cash value, or the policy lapses and the owner loses everything they put into it. Why does this happen?
Most universal life insurance products have an increasing cost of insurance the older you get. The cash value account is actually intended to help you save up enough money for the future to help offset this rising cost. In a perfect world, you start the policy paying $10k a year, and even though your cost of insurance when you’re in your 80s might increase to $30k a year, you can still pay $10k and the other $20k will come out of your cash account. But this doesn’t always work out.
Sometimes policies underperform market projections, and the insurance company is allowed to increase the insurance rates to make up the difference. This means when you started the policy $10k a year in premiums would have been enough to keep the policy in force until you reached age 100, but now it only keeps it in force to age 82. And many people will ignore their statements and notices until they are about to turn 82 and find out they have to pay $30k now instead of $10k, and that’s just for 1 more year of coverage. Because they haven’t budgeted for that, they can’t afford it and risk losing everything. If they have $5k in cash surrender value, perhaps they take that instead. If they were to sell the policy they might be able to get significantly more with a life settlement. If they did review their statements and noticed that in the years ahead they would have to pay significantly more, maybe they were smart and were able to surrender their policy while it still had $50k or $100k in cash value left. Still, they probably would get more by selling the policy in a life settlement.
As you can see, life insurance is not created to help people become wealthy for a bargain or else the insurance companies would go under. So accepting the fact that you actually have a low probability of getting a death benefit from your policy suddenly changes the narrative away from thinking that a death benefit is a sure thing. If you sell the policy now, you walk away from a contract where you actually have very little control and potentially expensive premiums for many years to come, but that settlement you receive will be a sure thing when it hits your bank account.
With these points in mind, selling your policy may be your best option.
A life settlement is the sale of a life insurance policy to a third party. The owner of the life insurance policy gets cash for the policy. The buyer becomes the new owner and/or beneficiary of the life insurance policy, pays all future premiums, and collects the entire death benefit when the insured dies. Healthy people decide to sell their life insurance policies for many reasons. Some of the most common are: changes in the financial needs of dependents, a desire to eliminate or reduce premium payments, or the need for cash to meet expenses. Policies may be sold directly to a company or through a broker who works for you and "comparison shops" for life or viatical settlement offers. The buyer pays the broker a commission if the sale is completed.
The short answer to this question is yes, it is possible to sell a term policy for cash. Most term policies have a conversion privilege which allows you to replace your term contract with a permanent universal life contract without having to go through underwriting again. When an investor buys a policy they want the coverage to be permanent in case you end up living a long life. They want to be able to recoup their investment at some point, even if they end up losing money on it.
To find out if your term policy is still convertible you can simply review your original contract, looking for language about Conversion options, or a Conversion Deadline. Some policies end their conversion option by a certain age such as 70, or age 75, while other contracts end the conversion privilege at the end of the term. If you don’t have your original term contract you can simply call your insurance carrier and ask - is my policy still convertible?
If it is, then you’ll want to work with our life settlement broker to help order the right conversion illustration. We’re not converting the policy just yet, but rather finding out how much it would cost, and we can present this illustration to buyers to see if they want to make an offer. If it’s an interesting case then we may get multiple offers and will seek out the highest bidder.
If you decide to accept the offer, then typically we will start the conversion process during the closing process. The conversion illustration will not be converted until the new policy is signed and the first premium paid.
These conversion products can be very complicated, and you don’t want to waste time ordering the wrong things, so let us help you get started on the right foot. Fill out our free appraisal request which you can access with the button at the top of the page, or give us a call at 213.784.1481.
FAQs
What is a life settlement and how does it work?
A life settlement is the sale of an existing life insurance policy to a 3rd party investor. Underwriters will review your medical records to get an idea of how long you’re likely to live and compare that with the future premiums on the policy. If the numbers crunch positively, they will make an offer. The closing process requires legal due diligence and contracts with the settlement released to the seller once the policy owner and beneficiary have changed. The new owner assumes all future premiums and the previous owner takes a cash settlement now and walks away from the contract.
What are the benefits of selling a life insurance policy?
Selling your life insurance can relieve you of having to pay expensive premiums for the rest of your life while also providing a cash benefit today. This can greatly increase your cash flow, improving your financial position while giving you more control.
How do I determine if selling my life insurance policy is the right choice for me?
Some basic questions to ask yourself before selling a policy are - do I really need this coverage? And, can I afford this coverage for years ahead? Then start with a free appraisal to see if your policy qualifies and to get an idea of its potential value. If it’s worthy of testing the market, your broker will help you gather the necessary information to go to market. Then you can consider real offers from buyers without obligation to accept.
References:
(1) https://portal.ct.gov/CID/Fraud/Fraud/Selling-Your-Life-Insurance-Policy-What-you-should-know-about-Life-and-Viatical-Settlements
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.
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