Universal life insurance policies, also referred to as flexible premium adjustable life insurance, can be great products, but unfortunately most consumers of these policies are not experts at these products, and oftentimes find themselves surprised later on that they had no idea their policy would end up in trouble.
Your typical universal life or whole life policy is going to have a cash value account. This account grows each time you contribute money to it, and also will have an interest crediting option to help it grow even more over time.
The surrender value of a policy is based on the portion of premiums that went into the cash value account plus the interest rate paid or investment gains. From that, outstanding loans are subtracted, along with any surrender fee. (1)
The name, flexible premium adjustable life insurance, means that in a universal life policy you can pay a higher premium this year to increase your cash value, or you can pay a lower premium and not contribute as much to the cash account. And if you have enough cash to cover this year's cost of insurance, you can even skip a premium payment all together and your charges will simply be withdrawn from your cash account. So technically your premium can be flexible, and your death benefit can also be adjusted up or down.
Whole life policies don’t have this flexibility, and the crediting option is going to be fixed. This is a much more conservative product that almost operates like a savings account with life insurance tied to it. If you live until the end of the policy term, typically age 90 or 100, then your policy will have reached maturity and they will pay out your death benefit because you’ve essentially paid for the whole death benefit by then. Sounds ok, but these are considered more expensive products than universal life. The rest of this article will be about universal life policies.
Getting back to that cash value account. During the sales process this account is often highlighted as an opportunity to grow your own retirement account, and you can borrow this money and not have to pay it back. If you need a short term loan, this is a great feature, but if you don’t plan on paying it back reasonably quickly, your policy can end up in danger of lapsing fairly quickly. I will explain.
These contracts have an increasing cost of insurance the older you get. So if you start the policy when you’re young, around age 40, and you pay a $5000 annual premium, a rough guess would be that $1500 is going to cover your insurance costs, and the other $3500 is going into the cash account. If you wanted to set yourself up for more success on the policy you might consider paying $7k a year, or even $15k every now and then. This money will grow with interest over a long period of time, so it’s wise to pay more in the beginning if you can. But most people stick with their planned premium of $5k without thinking about it.
When you reach retirement age, your cost of insurance will increase significantly. Back when you were 40 maybe it was $1500 a year, but now in your 70s it might be $15k - $20k a year. Depending on your policy, your 80s and 90s might look more like $30k - $50k a year (depending on your death benefit amount of course).
The truth is, the cash value account is really designed to help you offset those future increases in your cost of insurance. A properly designed illustration during the sales process will show that if you pay $5k a year there should be enough cash value in the policy by the time you are older that the policy can continue the coverage until age 100 by just paying $5k a year. If you under-fund the cash account, then your coverage will end a bit earlier than originally planned unless you pay a much higher premium to keep it going. So borrowing money and not paying it back will speed up this decline faster.
Another unfortunate reality is that the fine print on these universal life policies will tell you that the projections are not guaranteed. It’s not that they’re trying to be unfair, but they’re telling you that they don’t know what the future economy looks like, and if there’s a major correction in the market creating a big economic downturn, they are allowed to increase the policy charges to make up for those losses, and in turn you will have to pay a higher premium if you want to keep your coverage going to age 100. But again, most consumers are not experts, so they don’t understand these statements if they get them and/or read them, and continue paying their $5k a year, and by the time they reach their 70s or 80s they get a statement that basically says: $5k is not going to cover another year of coverage, so if you want to keep the policy you’ll need to pay something like $20k this year. And this amount is only going to increase each year since you don’t have any cash left to help cover the difference.
It’s at this point when people face their unfortunate reality that the policy they’ve paid into for years and years is about to end up going to waste if they can’t come up with $20k for just another year of coverage. The good news is that the life settlement market is there to help people sell their existing life insurance to an investor who can afford those premiums. They will pay you a cash settlement now and relieve you from all future premiums. In turn they will also collect the death benefit to recoup the money they invested with interest, and depending on your age, health, and cost of future premiums, they may be able to offer you a significant amount of money. Each case is unique.
So when is the right time to surrender a policy? As the saying goes, hindsight is 20/20, and knowing that you’re going to live a long life is not something we can predict many years in advance. If you knew you would live a long life, then probably the best time to surrender a policy would be the time when your cash surrender value peaks before it starts to decline, which is probably sometime in your 50s, 60s, or 70s depending on your unique contract and how you’ve funded the cash account. When you study an illustration you can see when the cash account starts decreasing, so ideally you would surrender it just before then, factoring in your annual premium for the year as well. Depending on the policy, though, this surrender value might be say $150k, and your death benefit is $500k. For most folks they’d probably feel that sticking with it for the $500k is the better option, so they hang on until they find out otherwise years down the road.
Long story short, if you’re thinking about surrendering your policy and you’re age 70 or older, or have a terminal illness, you should consider getting life settlement offers before surrendering. Oftentimes we can get offers for significantly more than the surrender value on a policy, so it would be worth it to at least consider. A great way to get in touch with us is to fill out the free appraisal request form, and we’ll be in touch to answer all of your questions.
A popular question I often get is can you sell term life insurance policies? My response to can you sell a term life insurance policy is yes but unless you have a terminal illness then your term policy will need to still have its conversion priveledge.
Usually when we convert a policy we convert it to a universal life product. The life insurance company will issue a new universal life policy to replace your old term coverage without having to go through underwriting again. You can find your conversion deadline by reviewing your original contract, or you can call the carrier and ask - is my policy still convertible? If it is, we might be able to get you some offers.
FAQs
Why would you surrender a life insurance policy?
If you get to a point where you're older, in decent health, and don't really need the coverage anymore, you might be better off surrendering your life insurance and taking the cash instead of paying premiums for years to come. And you might get more cash by selling it in a life settlement instead of surrendering.
Do you get money back when you surrender a life insurance policy?
If there's a surrender value left in your policy, the insurance company will cut a check. Better yet, you might get a lot more if you sell the policy with a life settlement instead of surrendering.
How much will I receive if I surrender my life insurance policy?
Investors look at how many years the insured likely has left to see how many premiums they will likely have to pay and how long the investment will take to mature. Every case is unique, but the shorter your life expectancy the more money you're likely to get.
How long do you have to have a life insurance policy before it pays out?
It depends on the terms of the contract. Some are structured where if you die during the application process it will still pay out, others without medical exams require a 2 years elimination period. And if you sell your policy in a life settlement it needs to be at least 2 years old with some states possibly requiring longer.
4 years in life settlements
About the author:
I'm a life settlement advocate who became passionate about the industry when I helped my grandfather secure over 60% of his death benefit. Recently, I assisted an 81-year-old woman with $140k annual premiums by finding an investor to buy out her policy while still receiving most of her investment back.
I've also helped clients with expiring term policies receive payouts of $10k - $15k by converting to a new universal life policy. I enjoy educating both agents and clients on the potential benefits of life settlements and am always happy to provide feedback on potential cases.