You may have heard that people who own permanent life insurance policies have several options for getting cash out of their policy.
One of those options is participating in a life settlement or viatical settlement. This process allows the policyholder to sell their life insurance to institutional investors for a lump sum of money that’s less than the face value of the policy, but more than its accumulated cash value. It’s a safe, legal, and well-regulated process.
Typically, people over the age of 65 who own a life insurance policy with a face value of more than $100,000 and no longer want or need their life insurance can sell their policy. Many people who are curious about how much their life insurance policy is worth in a life settlement choose to contact a broker to get an estimate.
While the majority of life insurance policies sold through a life settlement are universal, whole, or variable policies, you can sell a convertible term life insurance policy for cash under certain circumstances.
Term life insurance basics
Deciding to purchase a term life insurance policy is a smart financial move. It’s a great way to provide for the future financial needs of loved ones in the event of the policy owner’s untimely death. Since cash value doesn’t build up inside the policy, when you buy term life insurance, you are really paying for only basic life insurance.
Annual premiums are much lower with term life insurance than with permanent life insurance. The younger and healthier you are the lower your premiums. Term life insurance is a popular option for people with young families and people who want to leave behind enough money to pay their debts, but don’t have a lot of savings built up yet.
People in their 20s, 30s, and 40s have many years ahead of them to earn money. They rightly assume that they probably won’t need life insurance in retirement because by then their kids will be financially independent. By the time their term life insurance policy expires, they hope to have enough money set aside to pay off any debts and provide for their own funeral and burial expenses.
Term life insurance policies offer great coverage in exchange for a small premium. Many term life insurance policies are convertible, which means the policy owner has the option to convert to a permanent policy without a medical exam. They also won’t have to go through the underwriting process again. The premium price increase at the end of the term is usually steep.
Many seniors who purchased term life insurance policies when they were younger find that they want the financial security for their beneficiaries provided by life insurance but converting to a permanent policy would make their premiums unaffordable. One option for seniors in good health is to initiate a new term life policy and go through the medical exam and the underwriting process.
What to do when your term life insurance is nearing its expiration date
Unlike permanent life insurance, there’s no cash value building over time in a term life insurance policy. So, when the term is up, assuming the policyholder is alive, it terminates. The policyholder no longer has life insurance and the insurance company keeps the premiums they’ve paid over the years as pure profit.
According to the Life Insurance Settlement Association (LISA), $112 billion worth of life insurance policies lapse each year. Less than half of all seniors in America are aware that they have the option to sell their life insurance policy through a life settlement. 90% of seniors who have let a policy lapse in the past would have considered a life settlement if they knew about the option.
Most term life insurance policies are renewable for a premium that is much higher than the initial level term period’s fixed premium. In fact, if the policyholder is willing to pay the increased premiums every year, they can be insured for the full face value of the policy until age 95.
This may be a good option for people who want life insurance but are uninsurable for a new policy because of advanced age or a health condition.
Certain term life insurance policies are eligible for a life settlement
As an alternative to letting a term life insurance lapse or converting the policy to an expensive permanent life insurance product, seniors can get access to cash by participating in a Term Life Settlement.
If the policy owner is over 65 or has experienced a decline in their health since they purchased their convertible term policy, and if the face value of the policy is more than $100,000, a term life settlement is probably a viable option. Policy owners younger than 65 with chronic or terminal health problems may also qualify for a term life settlement.
The other options include letting the policy expire and having nothing to show for years of premium payments or agreeing to pay higher premiums that may be 6-10 times larger than the original fixed premium.
In a term life settlement, an institutional investor purchases your converted life insurance policy and takes over the responsibility for paying the higher premiums. The investor is the new beneficiary of the policy and receives your life insurance policy’s face value when you die.
You receive cash in exchange for your policy. If you choose to use a life settlement broker to find an investor and negotiate the highest possible amount of money for your policy, you’ll pay them a pre-determined fee.
In some cases, a portion of the life settlement proceeds may be taxable. It’s a good idea to consult a tax expert to understand your potential tax liability.
You can learn more about life settlements and how your age, health status, and policy type may affect your ability to sell your life insurance in our Get Started Guide.