For term policy owners that are considering selling their policy, the first thing you should do, assuming you’re around age 70 and older, is check to see whether or not the policy is still convertible.
The majority of policy owners have no idea that their term contract has a conversion privilege, let alone understand what a conversion is in the first place.
In essence, a conversion means the insurance company will replace your term coverage with a universal life policy without having to go through underwriting again. Universal life is a permanent form of life insurance that will cover you for as long as you live.
Assuming it is convertible, the next thing we need to do is order an illustration on your insurance carrier's conversion universal life product to find out how much the policy will cost. We typically run these illustrations to age 100, and pricing on them can run all over the place, but regardless they’re going to be a lot more expensive than your term policy. As an example, it’s not unusual for a $1MM universal life insurance policy to have $50k annual premiums, but I’ve even seen a $500k policy cost $50k a year. I’ve also seen $1MM universal life policies cost $30k a year, which is actually pretty good.
So now that we know how much your conversion costs, and assuming it’s priced reasonably well, we can get into the pros and cons of selling your term policy.
The list of cons is fairly short, so let’s start there. Aside from the obvious that you will no longer have this life insurance policy and if this is your year to get hit by a bus, you would have been better off keeping the policy, if you've made it this long without getting hit by a bus the probability of this happening now is extremely minimal. When you sell your policy the pricing will be based on your life expectancy, and if the underwriter thought you had another 15 years then there’s a strong probability that you will.
Another con to consider is that you’ll have to fill out some paperwork that is the required legal process to do a life settlement. This will allow the new owner to order your medical records in the future if they want to check up on your health, and they may even send a brief survey once in a blue moon asking if your health has changed or you’ve changed mailing addresses. They’ll also have your spouse and listed beneficiaries sign paperwork to make sure they’re aware of the settlement. In the grand scheme of things, none of this should be a major con, and barely even noticeable at that, but everyone’s situation is different.
Moving onto the pros, when we’re talking about a term policy that is nearing the end of its term and still has a conversion privilege, unless you have the liquidity to choke down $30k a year in premiums, you’re probably going to just throw your policy in the garbage, i.e. let it lapse once the term ends. In rare cases when the insured is facing a terminal illness at the very end of the term, the renewable premiums after the term get tremendously expensive.
Another pro is that by collecting a settlement, you can begin to invest that money and the premiums saved elsewhere. Perhaps you use it to remodel part of your home, or fix up your car so you don’t have to buy another one. Maybe you use it to help a family member make a down payment on a home that will grow in value over time. Maybe you just simply use it to take a really nice vacation. Why the heck not? You’ve earned it.
So what went from one man’s trash became another investor’s treasure, and as the policy owner, you get a nice check when you sell it.
The benefits of selling a life insurance policy are obvious: The policyholder no longer has to worry about making the premium payments. They also get a lump-sum payment they can use for whatever they want. (1)
If you’re thinking of selling my term life insurance policy, you’re probably wondering how much it might be worth?
Every case is unique because every policy is priced differently, and every insured has a unique health history, so there’s no basic pricing chart, but here’s some things to consider.
When you apply for life insurance, the underwriter is looking for any possible thing they can dock you on to lower your health score and increase your premiums, but when you’re applying for a life settlement things go the other way around.
If you’re in poor health and managing some serious health concerns, the value of your settlement goes way up. And if you’re just in average health, and that means normal things for 70-year-olds like overweight, high blood pressure, etc., then you probably have another 15 - 20 years, and an investor is only willing to pay $10k - $20k for an average term conversion.
This may seem like a big difference between the death benefit and the settlement payout, but one must take into account the significantly larger premiums on the conversion. If they’re $25k a year for a $500k policy, the policy will cost $250k in just 10 years, and if you live 20 more years, the policy will actually be considered a loss even though it looks like you broke even. With investing, someone who spends $500k over 20 years to break even has made a terrible investment and should have closer to $1MM.
On the other hand, if you’re in poor health, someone with a 4 or 5-year life expectancy might receive up to $200k - $250k of a $500k policy, while someone with 2 years might receive $300k - $350k.
In the 2-year situation you might think - well why wouldn’t they just keep the policy if they only had 2 years left? If the insured has passed the term, the cost of that policy might be $30k a year, and not everyone has that kind of liquidity. Another thing to consider is that they might need access to cash to help pay for alternative cancer treatments and things of that nature. We call this living benefits, and even though the insured gets less than their death benefit in the settlement, perhaps their life and quality of life is improved because they have that cash to do so.
If you’re on the fence about it, I would say it’s always worth trying the life settlement market to see what kind of offers you can get. Can you sell your term life insurance? Yes, as long as it’s still convertible, the insured is around age 70+, and the conversion has reasonably priced premiums.
FAQs
What is a term life insurance policy?
A term policy is a contract that covers your life in the case you die during the term, and the contract is for a level premium for a set number of years, typically 20 or 30 years which is considered the term.
What are the pros of selling a term life insurance policy?
The pros are that you can get some money back for a policy that had no value to you.
What are the cons of selling a term life insurance policy?
If you sell your policy you no longer have the coverage, but people often sell it when they're nearing the end of their term, or don't need the coverage anymore.
How can I determine the value of my term life insurance policy?
Work with a life settlement broker who can help you gather the right information and determine if your policy has any value, and what that might be. Request a free appraisal.
What are some alternatives to selling a term life insurance policy?
Your alternative to selling a term policy is either hanging onto it or letting it lapse, ie throw it in the garbage.
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.
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