The Hidden Opportunities of Selling Your Life Insurance Policy

The life settlement industry has changed the way people view life insurance. Life settlements also known as life insurance settlements, senior settlements, or senior life settlements have quickly become an important tool for insured age 65 and over. A life settlement is a financial transaction in which an insured over the age of 65 sells an unneeded, under performing, or unwanted life insurance policy to an institutional investor. Each case is looked at differently based on the health of the insured, policy size, premium amount, and cash value (if any).

Historically, if coverage was no longer needed the insured would surrender the policy to the insurance carrier for the cash surrender value of the policy or discontinue coverage. This was typically prompted by a change in the insured’s need for the insurance policy. In today’s environment there are three common reasons an insured should consider a life settlement:

  1. The policy is no longer needed
  2. The policy premium payments have become too expensive
  3. The proceeds from a life settlement reduce the premium payments of a new policy for the same amount of death benefit

The difference between what a policyholder could receive for surrendering their policy versus the fair market value of the policy is astounding. A study conducted in 2002 by the Wharton School at the University of Pennsylvania found that while the surrender value for average policyholder’s amounted to a total of $93.4 million, the fair market value for policyholder’s amounted to $336.3 million combined. This is a total 3.5 times more then what the policies would have been surrendered for.

Before deciding whether you are a candidate for a life settlement there are several factors you should consider. First, a life settlement refers to the sale of a life insurance policy. The sale of this policy results in a cash payment which is generally much more than the cash value an insured would receive for their policy from the insurance carrier. When an insured enters into a life settlement transaction they agree to revoke all rights to their policy upon payment of the settlement.

Case Study #1
Mr. Miller is age 74 and owns a $1,000,000 universal life insurance policy with a $63,000 cash surrender value. His wife passed away just over a year ago and the coverage was no longer needed. The policy was sent out to bid and was purchased for $265,000. Mr. Miller purchased an annuity with the net proceeds to support his income needs.

Case Study #2
Mrs. Johnson is age 83 with a $2,000,000 universal life insurance policy with a $120,000 cash surrender value and annual premium payments of $80,000. Due to low interest rates in the policy the coverage was projected to lapse in 3 to 4 years based on the current schedule of premium payments. In order to maintain the coverage to age 100 Mrs. Johnson would have had to increase her premium payment to over $200,000 per year for the rest of her life. Instead of surrendering the policy to the life insurance carrier she decided to shop her policy in the life settlement marketplace. An investor was willing to purchase the policy for $200,000. Using the life settlement proceeds, new coverage was obtained with an annual premium of $76,000 guaranteed to Mrs. Johnson’s age 100.

Case Study #3
Mr. Adams is age 75 with a $10,000,000 10-year term insurance policy he purchased three years ago with an annual premium payment of $350,000. Since the policy was a term insurance policy there was no cash surrender value. Mr. Adams was able to replace the coverage with a new 10-year term insurance policy for $10,000,000 with an annual premium payment of $310,000. Reducing his annual premium outlay by $40,000 per year and extending the length of coverage for an additional three years. The original $10,000,000 term insurance policy was sold for $2,800,000. The net sales proceeds funded a $500,000 gift to charity and the balance was used to pay the first seven premium payments on the new policy.

A life settlement can be a great alternative to letting your policy lapse, surrendering the coverage for the cash value, or reducing premium payment on like coverage. If you are eligible or considering a life settlement we encourage you to contact us to discuss the complete process and potential benefits of selling your life insurance policy for cash.

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