Few people know that life insurance can be used to help fund their retirement. Many of us purchased life insurance decades ago when we had a salary and were raising a family. However, as we’ve aged, the need for that policy’s coverage has decreased.
The unfortunate fact is that 80+% of life insurance in the U.S. is never paid out. Most policies are surrendered or cancelled while the insured is still alive so the insurance companies don’t end up ever making a final payment. This is great for the insurance companies, but a big loss for the consumer.
The issue is that most consumers don’t see life insurance as an asset. We’ve been trained to think of it as an expense. However, the reality is that life insurance is a piece of property we own and, like anything else we own – say a house or a car, it can actually be sold to someone else for money. This is called a “life settlement.”
How a life insurance settlement works
- The policy owner receives an upfront cash payout from a life settlement investor (typically a bank, an investment fund, or other large financial institution).
- The owner of the policy becomes the buyer and the buyer is responsible for paying all the premiums going forward.
- When the insured passes away, the buyer will be paid the policy’s benefit amount.
Life settlements can help you monetize an asset you may not have known you had. It can turn an expense into a source of capital. Generally, seniors use the new funds to pay for retirement home expenses or to improve the quality of their life.
It’s important to note that life settlements are not appropriate for everyone. Later in the article, we discuss who it might be appropriate for and what some of the alternatives are. In any case, we believe everyone should be at least aware that this option exists. It’s important to know if you ever need to make a decision about your policy.
What Is My Policy Worth?
The average life insurance sold today results in a price of approximately 20%-25% of the policy death benefit. This means that a qualifying $1,000,000 policy is worth on average $200,000 to $250,000. Of course, what your specific policy is worth depends on your case. Generally, the aspects that factor into your policy’s value are:
Age & Health – The most important factor in valuing a policy is the insured’s life expectancy. This is calculated based on the insured’s age and health. The lower the life expectancy, the higher the policy’s value.
Policy Size – Policies with higher death benefits are worth more.
Premium Payments – A lower annual premium relative to the policy size will result in a higher selling price.
Who is a Candidate to Sell Their Policy?
Not everyone qualifies to sell their policy because not all policies are marketable. Generally, there needs to be some intrinsic value in the policy for a buyer to purchase it.
There are three general criteria for qualifying a life insurance policy. These are rules of thumb and do not guarantee that your policy is marketable. If you are interested, contact a life settlement broker to evaluate your case – reputable brokers will generally provide this evaluation for free. Here are the three general criteria:
- Age and Health: The insured must be 65 or older. Those who are younger can qualify if their health is declining.
- Death Benefit: The policy benefit amount must be at least $100,000.
- Policy Type: The policy must be a universal life, whole life or convertible term life policy. Standard term life policies are not eligible.
Under What Scenarios Should I Consider a Life Settlement?
Generally, you might consider a life settlement if your personal circumstances have changed such that your life insurance policy no longer fits your financial needs. Most scenarios for why someone might sell their policy fit into one of the following categories:
(1) The Insured Needs Capital
Because the insured can obtain a large sum of money for selling the policy, life settlement can be an attractive way to finance a large payment versus taking out a loan. For example, common uses include paying for nursing home expenses or medical bills. Others have used the capital to fund an underfunded retirement plan or to pay for a grandchild’s education.
(2) The Policy’s Premiums Have Become Too Expensive
Policy premiums that were affordable when the insured had a fulltime salary may be too expensive on a retirement income. Furthermore, some insurance policy’s premiums can increase with age (such as Universal Life policies) making it even harder to afford keeping the policy in-force.
(3) The Coverage is Unnecessary
Life insurance is typically purchased to ensure the financial security of one’s children and family. However, after many years, it may no longer be necessary because the kids have grown up and are fully independent. The safety net provided by the policy may no longer be worth the annual expense.
Life settlements should be considered alongside other options. It is not always the right solution for every situation and every individual. Below is a general guideline of the other options for your life insurance. Please always speak with a financial advisor to ensure that you are making the most effective financial decision.
- Paying Premiums with Cash Value – Your cash value can be used to pay your annual premiums. Some policies automatically enable this, but you should call your insurance agent before deciding to skip a payment.
- Withdrawing Cash – If you’ve accrued enough cash value, you can withdraw part of that by reducing your death benefit.
- Taking out a Policy Loan – You can actually borrow money against your policy by using its cash value as collateral. Most policies enable this as a feature. If structured properly, you can use your death benefit to pay off the loan at the time of passing so you never have to actually pay back the loan.
- Surrendering the Policy – Another way to extract cash value is to surrender your policy. However, if you are seriously considering a surrender, please check with a life settlement broker to see if you can obtain a better price by selling your policy.