Term Life Insurance Mistakes to Avoid
Updated: Jan 9
Term life insurance is the most common type of life insurance because it provides the most amount of coverage for the least amount of money. But the reality is that most policy owners will outlive their term, and therefore should be keeping an eye on certain deadlines in their policy if they ever want to try to sell the policy to recoup some of their premiums paid into the policy.
Can you sell term life insurance policies? Yes, it is possible to sell a term policy, but we need to find out whether or not your term policy is still convertible as there is a deadline for when you can do this. Even if your not ready to sell, you should know when your deadline to convert is because if you don’t keep an eye on this deadline and miss it, we probably won’t be able to sell your term policy anymore. You’ll want to avoid this common mistake.
Most policy owners are unaware that their term policy has a conversion privilege. Converting a policy means the insurance company will issue you a new, permanent life insurance contract such as a universal life policy without having to go through underwriting again, which will replace your term policy coverage. Whatever health rating they gave you when you applied for your term policy, they will simply apply that health rating to the new universal life policy and use your current age.
When we’re looking at getting life settlement offers we’re not going to convert your policy just yet. In fact you really should not convert your policy before applying for offers if your intent is to sell the policy. Oftentimes when someone converts their own policy they end up selecting the more expensive product because that’s what the sales person recommended, and then that product is too expensive for any investor to buy it, and you end up stuck with this expensive policy that you’re paying premiums on, and probably end up losing money instead of making any; not good. Avoid this mistake.
Also, many insurance carriers pay a sales commission to convert a policy, which adds more money to your settlement pot. Oftentimes this conversion commission helps to fund your settlement where you otherwise might not get one, so it means more money in your pocket if you wait to convert, and also let us help set you up for the most success.
So now that we’ve established that we’re not converting your policy just yet, let’s talk about this conversion deadline. If you have a Primerica policy, they don’t offer a conversion, but for most other carriers they typically include this provision in your original policy contract. Hopefully you have this neatly stored in an easy to access place, but if you can’t find it then you’re normal. For term policies that are not convertible, we can only sell these if your have a terminal illness.
If you do have your policy, you’ll have to skim through the pages looking for language about a conversion privilege, conversion deadline, etc. This deadline is often worded as having to convert by a certain birthday, or by the end of the term. If you’ve already passed the end of your term you’ve most likely missed this deadline.
If you don’t have your policy contract you can always just call the insurance carrier and once they’ve figured out your policy number, you can just ask them if your policy is still convertible. They’ll be able to look it up and tell you the specific date for this deadline.
Getting life settlement offers can often take a couple months to get, and the closing process can take another month.
Sometimes I get clients who only have a couple weeks or even a couple days before their conversion deadline, but if we get moving on it quickly we’re still able to make it work.
For any conversion, we need to order a conversion illustration on the more basic universal life product that they offer to convert to, and we usually order it as minimum level premiums to age 100. With that illustration we can present that to buyers along with your medical records to have them review and see if they want to bid.
In some cases the premiums shown on this conversion illustration are so high that we can tell right away that we’re not going to get any interest, and in other cases the premiums are reasonable and we pursue offers.
When we don’t have enough time for everyone to do their review, we’ll submit a conversion application so we don’t miss your deadline. Because insurance companies are notoriously slow, it will likely take them several weeks to even create the policy. Because a policy is not in-force until the contract is signed and the first premium is paid, we’ll have several weeks to have your case reviewed and hopefully receive some bids on it, wrapping up the closing process just in time to put the policy in-force.
If you want to sell a term life insurance policy there’s some basic criteria to consider beyond just the conversion privilege. Because investors are looking at buying these policies as investments, they’re not gambling on the fact that you might get hit by a bus next year, but rather based on your age and current health, how many years do you likely have left.
The general cutoff for consideration on someone who’s in average health is age 70. While not everyone lives to age 90 or 100, at least at age 70 they can figure a reasonable probability of 15 - 20 years. They need to have a good idea to project how many future premiums they are going to pay, and how long the investment is going to take to mature.
About 70% of Americans say they need life insurance, but only 54% actually have it, according to a recent LIMRA annual consumer study. (1)
If someone has a $500k death benefit, one might assume that if someone pays them $400k for their policy that it’s a good deal for an investor because they’ll make $100k profit, but that would only be the case if the insured died shortly after selling the policy, and that’s not likely.
The reality is, their premium might be around $20k a year for that $500k policy, and they might have another 10 years of living. So the cost in premiums on this policy will likely add up to $200k. If you figure the investor is making $300k profit on this, you’re missing the time value of money. Inflation lowers the value of money over time, so $500k today is not worth as much as $500k 10 years from now. To factor in the time it takes for the investment to mature, the investor has to solve for an interest rate for each year their investment is out before it comes back. In the beginning there’s the initial settlement paid to you, plus the premiums. Each year the premium is paid is a higher balance upon which they need to make interest. A small settlement won’t accrue much interest for a while, but a large one will quickly accrue a lot of interest.
Long story short, if you’re hoping for windfall on the sale of your term policy, it’s not likely to happen unless you’re in poor health. Even a $1MM term policy on a healthy 70 yr old is not going to fetch a huge settlement, but it will help you recoup some of the money you paid into the policy. If someone paid you $15k to fill out some paperwork instead of throwing your policy in the garbage, that’s a pretty good proposition. The investor may likely pay $600k over 15 years for that $1MM death benefit, so it's not as if they are robbing you blind, but rather giving you an opportunity to some of your money back on an insurance contract that didn't do you any good.
If you're interest in getting help and having your policy reviewed, fill out our free sell life insurance policy calculator form and we'll get back with you promptly.