Do you have a life insurance policy that you’re about to let lapse? Maybe you’re thinking about surrendering the policy for its cash value. Are you 65 years or older?
There’s a really good chance your life insurance policy could be a hidden asset you didn’t even realize you have. In this educational blog, we’ll explain life settlements and address some of the common questions policyholders have about them.
What Is a Life Settlement?
A life settlement is the term used to describe the sale of an existing life insurance policy. It is also the term used to describe a policy after it is sold. In a life settlement transaction, you agree to transfer ownership of the policy to a third party in exchange for an immediate cash payment. When the person covered by the policy (i.e. the insured) passes away, the third party who bought the policy collects the death benefit from the insurance company.
Life settlements almost always involve the sale of permanent life policies (such as whole and universal life policies, but term policies can be sold as well, especially if they can be converted into a permanent type of life insurance). The buyer also takes over the responsibility for paying all future premiums for the policy to keep it active and in good standing until the insured's death.
Why Would I Want to Sell My Life Insurance Policy?
Selling a policy involves the policyholder conveying their life insurance to another party, usually a financial services company. As the buyer, they will own your policy once the transaction is complete, meaning that this company will pay its premiums and collect the death benefits after the death of the insured.
This process is also known as a viatical settlement or a life insurance settlement, and if you qualify, it may enable you to receive a larger amount of cash for your unwanted policy than if you would receive, surrender or cancel your policy for its cash value. When evaluating the benefits of a life insurance settlement, remember your policy will become the property of a third party, whose objective is to collect the death benefit when the insured dies.
Thousands of life insurance policyholders do not know about this option, which is available to them. They can reclaim the value of their unwanted or unneeded policy by selling it and using the proceeds to fund their golden years. A life settlement can cover long-term care, medical, or any other expenses the policy owner faces. Unfortunately, most policy owners do not benefit from their policies because they lapse or surrender them without knowing they might be able to sell them.
Am I Eligible for a Life Settlement?
Generally speaking, the best candidates for selling their life insurance policies are those who are seniors and people whose health has changed significantly since the policy was first issued. Having a history of illnesses or being in poor health can also increase your chances of qualifying for a life settlement.
However, if you’re in perfect health, you’re not automatically excluded from selling your policy either. At a minimum, most life settlement companies will consider you if you’re at least age 65 and your policy has a death benefit of $100,000 or greater.
How Much Money Can I Make From a Life Settlement?
A wide variety of variables go into determining the value of a life settlement. They can range from multiple considerations including (but certainly not limited to:
- Health status
- Age of the insured
- Age of the policy
- Ongoing cost of premiums
- Many different factors of how the policy was originally purchased
Every policy and policy holder are different. Another important factor is the current surrender value of the policy. The cash surrender value is the sum of money an insurance company pays to a policyholder in the event that their policy is voluntarily terminated before its maturity or an insured event occurs.
- Over 92% of life insurance policies (by face amount) terminate without paying a death benefit.
- Death Benefit Paid – In 2018, $57 billion was paid on individual life policies. That is only 7.5% of all policy terminations.
- Cash Surrender – In 2018, policies with an aggregate face amount of $133 billion were returned for the contractual cash surrender value.
- Lapse – Most individual life policies simply lapse, and owners receive nothing. In 2018, 7.7 million policies, with an aggregate face amount of $570 billion, lapsed in this way.
- Lapse rates are increasing … 40% higher than five years before.
- And, lapse rates could increase even more due to the economic impacts of the COVID-19 pandemic.
To explain how it works, let's take a look at a hypothetical example:
POLICY VALUE EXAMPLE:
John is a 77 year old male whose health has significantly changed as he’s aged. He now has multiple ailments and is inquiring about how much money he could make from a life settlement of his policy to help pay for his incurring medical expenses.
- John’s policy size is $250,000
- His cash surrender value, if he were to surrender it to his insurance agency, is $4,600
- His annual premium is $12,000
- And his life settlement value is $75,000
Each situation is different, so the best thing to do to determine the value of a specific policy is to speak to a professional in the Life Insurance Settlement industry.
Why Do Some Seniors Terminate Their Life Insurance Policy?
Seniors terminate their life insurance policies for various reasons. Most seniors at age 65+ own life insurance. However, seniors are 25% more likely to have policies lapse than the general population. You may be asking why this is the case.
75% of term and universal life policies are lapse or surrendered.
A few reasons why seniors tend to terminate their life insurance:
- The policy is no longer needed
- They need greater retirement income and resources for healthcare, LTC needs, etc.
- The policy becomes too expensive
What Are Some Risks of a Life Settlement?
There aren’t a lot of risks specifically to the policyholder. A life settlement may affect your ability to receive some government entitlements, like Medicaid, if you need it later on. It could also restrict your ability to obtain another life insurance policy down the road, so it’s important to evaluate your options and speak to a professional to evaluate the specific risks to you.
Perhaps the most important consideration in a life settlement is the fact that, if you, the policyholder, decides to sell your policy, your intended beneficiaries will no longer receive a benefit upon your death. This is why it's important to make sure they will truly no longer need it if something unfortunate were to happen. The risk lies with the beneficiary, not the policyholder. If they are insured, there is a theoretical limit to the total amount of coverage the life insurance industry will issue on a given life insurance policy. The sold policy still represents a portion of that amount. For example, if you have a lapsed policy, the risk is only with the beneficiary because they will not receive the cash value for it. The policy holder, when they have made the decision to sell, is valuing the need right now over the long term benefit for the beneficiary. The policyholder would like the lump sum of cash and not pay premiums any longer.
In simple terms, if you sell your house, you won’t have a place to sleep until you use the proceeds (cash) to purchase another home. However, that effect is not a risk unless there are no other homes to buy or rent.
Essential Consideration for Anybody Pursuing Life Settlements
One of the most important things you must determine if you are selling your life insurance policy is whether the coverage would benefit you or your beneficiaries. If you need or want the policy and can afford the ongoing premiums, you may decide not to sell it. However, if you neither need nor want the coverage, if you would prefer not to pay ongoing premiums, or you have other financial objectives you can accomplish with the cash a life settlement can produce, selling your policy could be a viable option. In general, life settlements are suitable for people who either do not need or want their coverage, or do not have the resources to pay future premiums.
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