Term life insurance is the most common form of life insurance simply because it provides the most amount of coverage for the least amount of money. And most term policy owners have no idea that they might be able to sell their policy to an investor.
The reality is that most people are going to outlive their term policy, and while that sounds disappointing when you’ve paid thousands of dollars over the life of the contract, term insurance is often compared to car insurance, and nobody seems to complain about not getting insurance money when they don’t have any accidents. Most of the time, the cost of a term policy makes it a practical addition to most financial plans.
Nobody knows exactly how long we have to live, although I would argue that most actuaries and underwriters have a pretty good idea. Yes, there are scary things to consider and provide cause for caution. Every day there are fatal car accidents, people are diagnosed with cancer and other life-threatening illnesses, drownings, etc., which is why it’s good to have life insurance, but for the majority of people, they are going to outlive their term policy.
So you’re probably wondering at this point, how do I sell my term life insurance policy?
Unless you have a terminal illness, the first qualifying point is your age. If the insured on the policy is younger than 65 and does not have any major health concerns, we’re simply not going to get any interest. And even at 65, the possibility is unlikely except in rare circumstances. The typical age at which applicants start getting offers to buy their policy is close to age 70. Sometimes 68 or 69 works, but more often 70 and older. Why?
When an investor considers purchasing a policy they are looking at their age and health to try to determine how long someone is likely to live. Someone who is 65 years old and has no major health concerns very well may live to age 95, which is another 30 years. 30 years is a long time for an investor to pay into something before getting anything back. Even a bank that provides a 30-year mortgage is getting monthly payments, but life insurance does not pay anything until the insured passes away.
Someone who is 70 may have had a little more time to develop some health issues, and simply is just a little bit older making an investment just that much shorter. In all honesty, it’s still a gamble for the investor. This person could develop some health issues down the road and surprisingly pass away at age 78, or they might keep on ticking to age 90, but at least they have a modest perspective on how long the investment may take to mature.
If you can no longer afford to pay your life insurance premium, selling the policy can relieve the burden of a monthly payment and will put at least some of that money back into your pocket. Although there is always the option to simply cancel or surrender your policy to end monthly premiums, a life insurance settlement usually results in a larger payout and may therefore be a better option for some. (1)
So when an applicant is of age, what's reviewed for underwriting is their medical records. They’re not going to interview the insured simply because most people figure out that the shorter they’re expected to live the larger their settlement is going to be, and all the time I get clients who tell me they only have a few years left when in fact their underwriting might come back much longer.
So 3rd party underwriters will review your medical records to provide an approximate life expectancy. One report might say the insured has an average life expectancy of 10 years, while another says 12, and a third report says 9 years. Obviously, nothing is in fact, but it gives the investor the ability to put a projection on the investment to help them price it.
If an investor gets a 12-year report and a 10-year report, oftentimes they will average the two and settle on 11. Because this number is average, they have to consider the fact that an average means 50% of the people will live longer, so they often bake in an extra couple of years to protect themselves in case the insured lives longer than average.
The next very important piece is determining if your term policy is still convertible. Most policy owners have no idea what a conversion is, or that it existed in their contract, but it should be fairly easy to find.
A conversion is when your life insurance carrier replaces your term policy with a permanent life insurance policy such as a universal life policy. Because they already did underwriting on your term policy, they’re willing to apply that same health rating to a permanent policy without having to go through underwriting again. If you think about it, had you selected a universal life product at the original time of application for your term contract, they would have provided the same health rating to you then on a universal life contract, so they’re simply allowing you to exchange your term policy now for a universal life policy, regardless of whether or not your health has declined. This is indeed a privilege, but the cost of the new premiums will not appear to be a privilege to the consumer.
Because most people outlive their term policy, they’re pretty inexpensive. As an example let’s say someone has a $500k term policy. If they took it out in their mid-50s, perhaps they’re used to paying $2k - $3k a year in premiums. When we convert the policy to a universal life at age 70, the new premiums will probably look more like $25k a year. So if you do some quick math, by age 80 the owner of the policy will end up paying $250k in premiums, and if they live to age 90 they will have paid $500k in premiums for a $500k death benefit.
In simple terms, one might say that they broke even, but when you factor in the time value of money, had you invested that money in something else, over 20 years you’d probably have closer to $1MM.
Obviously, life insurance is not intended to be a get-rich-quick scenario, except when there is an early and unexpected death. So when someone has a $500k term policy around age 70 with average health, we typically get offers in the range of $10k - $15k.
For some policy owners, they look at the difference between the $500k and the $10k offer to sell the policy, and they think selling my term life insurance policy is ridiculously unfair, but when you look at the cost of premiums and the probability that one likely has another 10 years or more, it’s actually a pretty good deal. The cost to get a $500k death benefit is like going to be in the range of $300k - $400k in premiums over 15 or so years.
The majority of term policy owners just let their term policy go in the garbage anyway, so why not try to get $10k or $15k back to help recoup some of the money you paid into the policy?
Another way of looking at it is that an investor is willing to pay you $10k to fill out some paperwork that might take a few hours to complete. That’s a pretty good deal.
What is a term life insurance policy and how does it differ from other types of life insurance policies?
Term is just what it sounds like. The insurance company is offering coverage at a fixed premium for specific amount of time; the term. Typical term policies are 20 or 30 years, but can be shorter. Other types of policies are a lot more variable and can cover you for as long as you live, but tend to cost a bit more and carry a cash value.
How can I determine if my term life insurance policy has a cash value component that would make it eligible for a life settlement?
Term policies do not have a cash value, but if you can convert your policy to a universal life policy, you can sell it with a life settlement. Review your original contract for your conversion deadline or call your insurance company and just ask - is my policy still convertible?
How do I find potential buyers for my term life insurance policy and what is the process of selling it?
Your best bet is to work with a life settlement broker who can give you a lot more exposure in the marketplace. Not every buyer is looking for a term conversion, but hopefully we can find one or two willing to buy it and pay the expensive future premiums.
What are the pros and cons of selling my term life insurance policy through a life settlement?
The pros are that you can get paid for selling something that is essentially worthless to you. Most people sell their term towards the end of the term, so it's unlikely that they would pass away shortly after. The cons are that you're getting rid of your insurance coverage. Maybe you several more years left on the term and really need the coverage. Maybe you're better off keeping it if you need it.
How can I ensure that I am getting the best return on my investment when selling my term life insurance policy?
Work with a life settlement broker. They will search the market for the highest bidder and help you understand the math behind it.
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.