Besides providing loved ones with a source of funds for income replacement in the event of an untimely death of the family’s breadwinner, people buy life insurance for a variety of reasons.
Some of these reasons include:
• Funding expected estate taxes
• Funding a buy-sell agreement or key person insurance for a business
• Satisfying a lender's requirement when a loan was made.
Whether it was one of these needs or something else that caused you to purchase your policies originally, as circumstances change you may find that you no longer need policies that were taken out several years before. With life expectancy rates increasing, a life insurance policy might be better put to use by converting it to cash that can be used to pay medical or long term care expenses, for example. Particularly for those who find themselves in a situation where they have no apparent heirs but may be looking at significant healthcare expenses in the coming years, selling off old life insurance policies may make better sense. Depending on the policy, a policyholder might also be better served by selling their policy and growing the settlement in a different type of investment vehicle that could leave their beneficiaries with greater proceeds than the death settlement would have yielded.
If this describes your situation, before you allow a term life policy to lapse (or turn in a whole life policy for its cash surrender value), consider whether it might be more beneficial to sell the policy.
Known in the industry as a life settlement when the policyholder is not terminally ill, selling a policy can sometimes net the policyholder a sufficient sum that's in excess of a whole life policy's cash surrender value or a term policy unearned premium, but less than the death benefit.
When to Consider a Settlement
Because life settlements are designed for people who are not currently facing a life-threatening illness but who have a life expectancy of no more than 15 years, those over the age of 65 are good candidates. However, as a general rule of thumb, the closer you are to reaching your life expectancy (which is currently 70 for men and 74 for women), the higher the settlement you can expect to see. You may also exact a more attractive settlement if:
• You are older and ill but not terminally so
• You have a policy that exceeds $250,000
• Your policy carries with it a high death benefit; or
• Your policy has low premium costs
An ideal candidate for a life settlement is an insured individual over the age of 70 who no longer needs or wants the life insurance policy and who has experienced a significant change in health since the policy was bought. You may want to consider a life insurance policy settlement if you want to:
• Minimize premium costs and replace the existing policies with more costeffective ones
• Use the settlement proceeds to supplement your income
• Use monies from the settlement towards a different type of investment that may ultimately prove more advantageous to your heirs
• Fund a charitable trust
• Make cash gifts to family members now versus after your passing
• Use the proceeds for the remainder of your life since you no longer have beneficiaries who would benefit; or
• Eliminate unnecessary policies now that your estate needs have changed
If you are facing a terminal illness, it’s important to know that, while a life settlement is unavailable to you, what is known as a viatical settlement may be. Proceeds received from a viatical settlement may not have any Federal income tax and may, depending on your state of residence, be free from State income tax, as well.
How to Sell
Having purchased their policies years earlier, it’s common for many insurance policy owners not to know the current fair market value of the policies they hold.
If you are interested in exploring the idea of converting a policy you have into a cash settlement you can use to pay for other items now versus leaving more to your estate, you will first want to have your policy assessed to determine its current value.
If you do decide to settle, be aware that there may be tax ramifications which your Untracht Early advisor is also prepared to offer you valuable guidance on.
If you have an unneeded policy that you’re thinking about getting rid of or just letting it lapse, feel free to contact your Untracht Early advisor to discuss your alternatives.