Things you need to know about Selling a Term Life Insurance Policy
Updated: Jan 25
Term life insurance is the cheapest way to get the most coverage, making it the most popular type of life insurance contract, but many people wonder can you sell a term life insurance policy in a life settlement?
The short answer to this question is yes, you can sell term policies in life settlements, but it requires gathering a little bit of information to make sure your policy qualifies.
If the insured has a terminal illness, we can often sell the term policy as-is, but for individuals without any major health concerns we need to find out if your term policy is still convertible.
Most term policy owners are unaware of their conversion privilege, but the majority of term policies have one. To convert a policy means the life insurance company will issue a new permanent life insurance policy without having to go through underwriting again as they will simply use your original health rating that you received when you applied for the term policy way back when and apply it to a universal life product.
Ideally we can convert to a universal life product as those are cheaper than whole life, but every carrier is different. The reason an investor needs to convert your policy is because after your term ends the premiums will go up significantly each year you renew the coverage. For example you might be paying $1500 a year for your term policy during the level term, but after the term ends those premiums can look like $20k a year, increasing each year, then suddenly it’s $50k, etc. The costs can exceed the death benefit fairly quickly, and even worse, the coverage often ends by age 95. So if you were to live past age 95 the policy would be a total loss. By converting the policy to a universal life contract, that means the coverage will last for as long as you live.
The premiums on this new universal life policy will cost more than your term policy, but they won’t be as wild as keeping the term policy past the term.
So assuming your policy is convertible, the next thing we need to do is order an illustration on a conversion universal life product so we can see what those premiums will cost. We typically order as level premiums to age 100 with a level death benefit.
At this stage we’re not converting your policy, but rather we are taking a look at what it would cost to do so; you never want to convert your policy before getting an offer if your intention is to try to sell it. If we are successful at finding a buyer and you decide to accept, the conversion often happens during the closing process of the settlement with the new owner covering the cost of the new premiums.
A life settlement is the more technical term for selling your life insurance policy for a one-time cash payment. (1)
When you sell a term life insurance policy, people often wonder how much they might be able to get for selling it.
Consumers purchase life insurance for the what-if scenarios: What if I have a fatal car accident? What if I get a terminal illness? What if I get hit by a bus? While these things happen, and it’s important to have some coverage if it does, statistically speaking they are very unlikely scenarios. As such, when investors purchase policies they are basing their offer on what’s predictable rather than those what-if scenarios.
Typically they will review the last 3 - 5 years of medical records to get an understanding of the insured’s current health status. If a 70 yr old is in great health, that means that based on today’s information there’s a good chance this person will live at least until age 90, possibly even 100. On the other hand, someone who is age 70 and has a lot of health problems may get a 10 year life expectancy.
With 10 years, the investor can then project how many premiums they are likely to pay, and how long the investment is going to take to mature. If premiums are $15k a year, then they know the policy will likely cost $150k to keep it in-force for 10 years. They also need to solve for an annual interest rate that they need to make back on the money they invest. The actual investment may take 8 years or 12 years, but they settle on 10 for the most likely scenario.
Sometimes a client with a $200k policy that gets a 10 year life expectancy with projected premiums costs of $150k looks at those numbers and thinks it’s a great deal for an investor with a $50k profit, but the truth is that it really isn't a good investment over a long period of time. Let’s say they pay a $20k settlement too,which means the costs are really more like $175k on it, making only $25k profit. If that happened in just 1 year it’s not a bad investment, but because it took 10 years it is actually a terrible investment.
Comparably speaking, one who invests wisely should be able to double their money every 7 - 10 years. If the death benefit was more like $350k, then this deal might be closer to actually working with a smaller settlement amount to the seller.
Along with that theme, a lot of clients get caught up in the amount of their death benefit without taking into account how much it costs to get there. Life insurance is not intended to be a get-rich-quick scheme unless there is an early and unexpected death. When an underwriter approves an application they’ve reviewed mortality tables and actuary data to determine that there’s a high probability the insured will either outlive the term, or if it’s a permanent policy the insured will live long enough where they might surrender or lapse the policy. In other words the majority of policies do not end up paying the death benefit.
If we’re looking at selling a $2MM life insurance policy, the owner of the policy just sees the $2MM and believes they are holding a $2MM asset, but the concept is similar to purchasing a home with a mortgage. As an example, let’s say you purchase a $2MM home. You make a 10% down payment of $200k, and the bank covers the rest with a $1.8MM loan. You live in the house for several years making mortgage payments, and eventually decide to sell the house. The market hasn’t changed much since you bought it, so you turn it around and sell it for $2.1MM. Once escrow closes do you get $2.1MM in your savings account? No. Your mortgage balance is still near $1.8MM because you’ve been paying mostly interest instead of principle, so after that loan is paid off, plus closing costs, you only end up with about $200k in your savings which is about what you put into it.
So while it feels like you own a $2MM asset, the reality is the bank owns most of it. And when you compare that scenario with life insurance, the most probable scenario is that you live a long life and the premiums you pay on the policy are essentially going towards paying off the balance of the death benefit.
Personally I think real estate is actually a much better investment than a life insurance policy, and often encourage clients to consider how they could invest their money differently than spending so much on life insurance, which gives them more control over their money as opposed to waiting until death to receive anything. Life insurance, while often sold as a great investment, is really just insurance at the end of the day. And insurance is good to have, but that doesn’t make it a good investment. Perhaps you don’t need the insurance coverage anymore and a life settlement may help you to invest in something better.
To get a free appraisal on your policy and to speak with a broker, fill out the free appraisal request form and we’ll give you an idea of what your policy might be worth in the market, answer all of your questions, and represent your best interests in the market.