Life Changes, Policy Changes: Selling Your Term Life Insurance Policy
Updated: Mar 7
Term life insurance is a relatively inexpensive way to cover your debts and financially protect your loved ones in case something happens, and is often compared to car insurance. If we don’t die while the policy is in-force we don’t get anything, but you may actually be able to get something for your term policy.
As we all know, life changes, and so does your policy. Many folks who got a 30 year term policy in their 40s expect to replace their term policy with another one, but are shocked to find that the premiums for a new term policy in their 70s is going to be significantly more expensive than they’re used to paying; do they really still need the coverage at this point?
Another option people might look into is converting their term policy, which is an opportunity to replace your term policy with a new universal life contract that covers you for life even if you live past 100, and you don’t have to go through underwriting again. So you could actually have pretty poor health and still convert your term policy to a universal life policy.
But again, people are shocked to find that to convert their term policy, even though they don’t have to go through underwriting again, it is still very expensive once you reach your 70s.
The bigger question is, do you really need this coverage? Many buy into life insurance thinking they’re going to get the death benefit, but only a small percentage actually do. If you’re reaching your 70s, the real question is can you sell your term life insurance policy in a life settlement?
The short answer to this question is yes, it is possible to sell a term policy. The longer answer is that we need to collect some information about the policy to make sure it qualifies.
As you can imagine, investors that purchase life insurance policies are basing their investment on a project cost and length of time that the investment will take to mature. So if someone has very poor health and only a couple years left we might be able to sell the term policy as-is.
People living with a terminal illness often face very tough financial choices. Selling an insurance policy through a viatical settlement is one option that may be used to provide cash to help with current medical and living expenses. Like life settlements, viatical settlements involve the sale of a life insurance policy to a third party. In exchange for a discounted cash payment to the seller, i.e., a reduced percentage of the death benefit, the buyer becomes the new owner and/or beneficiary of the life insurance policy, pays all future premiums and collects the entire death benefit when the insured dies. (1)
On the other hand, if the insured is in average health, then we need to find out if the policy is still convertible.
Most term policies have a conversion privilege, but must policy owners have no idea that they can convert their policy, or what a conversion even means. Just review your original term contract to find out when that conversion deadline is, or if you don’t have your contract anymore you can simply call your insurance carrier and ask - is my policy still convertible?
If it is, you’ll want to find out when the conversion deadline is because selling a policy can take a few months, and we don’t want to miss that deadline if it’s coming up soon.
Next you’ll want to order a conversion illustration on the universal life product showing minimum level premiums to age 100 with a level death benefit. This will tell us how much your policy will cost to convert, and the premiums can be much higher than your term policy, so there’s no way of knowing without ordering this illustration.
Assuming the premiums are reasonable, the other item we need is recent medical records. Underwriters will be reviewing your medical records to produce a life expectancy report which investors then use to base their projections off of in order to calculate what they can offer.
Back in the 1960s, the average life expectancy was around age 70, but people are living much longer today. So someone who’s in average health at age 70 will have a very good chance of living to age 85, or possibly longer.
So if you have a 15 year life expectancy report, and your premiums cost $25k a year, that means your cost in premiums will likely be around $375k over the next 15 years. And if your death benefit is $500k, that might sound like a good investment to an individual, but if it takes 15 years and $375k plus the cost of the settlement payout, the interest that accrues over that time adds up pretty fast, and the deal isn’t so great after all.
In that scenario if your death benefit was $750k, or $1MM, then suddenly the investor has the opportunity to make some profit on it and is willing to pay a settlement now.
Many applicants that are around age 70 and in average health often wonder if selling a $1MM term policy that’s going to be converted is a good idea or not, especially when they’re looking at a $15k offer. That seems like a big discrepancy. If you put yourself in the perspective of an investor, if you’re going to put your money into something, you should probably have some kind of idea how long that money will be invested before getting any of it back.
While it’s entirely possible that someone could sell their policy and pass away unexpectedly just a year later, that scenario is very unlikely. And while it may happen on occasion, making the investment far more profitable than expected, the opposite happens too.
Someone might be in average health at age 70 and is projected to live until age 85, but may find themselves in perfectly good health and active at age 85, and might have another 10 years ahead of them. In this type of scenario the investment turns into a major loss, and the investor may resell the policy to another group just to get out of it and cut their losses. So while both scenarios can occur, ideally they balance each other out, and beyond that, the underwriting reports that are done end up being reasonably accurate most of the time.
And what happens after you sell your term life insurance policy is the same thing that happens after you sell any asset, be it a boat, a house, a treasured car, etc. Once the sale is complete you move on and don’t really think about it beyond that. Whatever happens to that investment doesn’t matter to you anymore, but you did get some money for selling something that was essentially worthless to you, which is not so bad.
Get started by filling out our free appraisal request form and we’ll help you get the process started.
Why would someone want to sell their term life insurance policy?
People usually sell their term policy when they're nearing the end of the term, nearing the end of their conversion period, or simply don't need the coverage anymore. You can turn a financial burden into an asset with a life settlement.
How can a policyholder determine if selling their term life insurance policy is the right decision?
Talking to a life settlement broker can help you figure out if it makes sense for you. If you need the coverage and can afford it, keep it. If you don't really need it anymore, most term policies are unlikely to pay out anyway, so why not get some money back on your insurance premium expenses over the years.
How does the process of selling a term life insurance policy work?
A life settlement broker can help you find out if your term policy is still eligible, help prepare your case, and give you the most exposure in the marketplace.
Are there any risks associated with selling a term life insurance policy?
If you were to pass away shortly after selling the policy I suppose that would be your risk, but statistically speaking this is very unlikely.
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.