Broker Check

Sell your Life Insurance?

July 10, 2015

If you have a life insurance policy that you do not need or payments have become too expensive selling it may be an option.  Other people can sometimes find value in something is not valuable to you.  In the case of life insurance policies, this has created a whole market that is largely unknown.

The price of a life insurance premium is based on the likelihood of someone passing in a certain period of time and the amount to be paid out to the beneficiary when that happens.  The amount of all future premiums is determined based on the health of the individual at the time of purchase.  The worse the health of the insured is the higher the premium the insurance company will charge.  If the insured’s health declines the probability of their passing in the given time period increases.  If this occurs after purchasing a policy, the value of the policy increases.  However, the beneficiary can not collect on the policy until after the death of the insured.

There are investors that realize the value created in this situation and are willing to purchase these types of policies.  When the owner of a policy sells it to a third party it is called a life settlement.

Here are some guidelines to determine if your policy may qualify for such a transaction:

  • The Death benefit of the policy is greater than $100,000.
  • The insured is a male age 77 or older or has a life expectancy of 13 years or less.
  • The insured is a female age 78 or older or has a life expectancy of 12 years or less.
  • The policy is a Universal Life policy with a cash surrender value of less than 10% to face value.
  • The insurer is an A-rated or better company.
  • Whole life, VUL and term policies that are not convertible are less likely to find a buyer.

A 72-year-old retiree has a term life insurance policy that is nearing the end of its term.  She is considering allowing the policy to lapse because the premiums will substantially increase if she renews.  Since it is a term policy, it has no equity or cash surrender value.  If she allowed it to lapse she would receive nothing upon surrender.  She may be able to sell the life insurance policy and get paid to transfer ownership.

A 73 year old had a term policy with a $3,000,000 death benefit that was nearing the end of the term.  The policy was converted and sold to an investor for $50,000.

If you need some coverage but not all of what your policy provides you may be able to sell part of the policy and have the investor take over the premium payments.  This would free up cash flow and still provide some coverage.

Investors are trying to make money on the deal but they also need to make it attractive to you to make it happen.  If you have a policy that fits the criteria then shop it around to compare offers.  Offers will not come close to matching the death benefit of a policy but if you were going to surrender the policy, any offer is better than nothing.  Remember that this type of transaction is not appropriate for anyone with a need for the insurance coverage.