The primary purpose of life insurance is to replace income should a bread-winner die prematurely. Most families accept this responsibility as a necessary expense, as they do other forms of insurance such as auto or homeowners insurance. What you might not realize is that most life insurance policies are surrendered long before the policyholder dies. Think about it for a moment. The insurance company collects premiums for years, even decades and then the policyholder drops the policy before he dies. In fact the insurance companies count on high lapse rates and use this information to lower premiums.
In recent years, investors have recognized an opportunity and have begun stepping in offering to purchase policies from policyholders who no longer want them. The transaction can mean big money for investors and policyholders alike. Let’s look at a recent case example. A policyholder decided he no longer wished to pay premiums on his $1 million policy. The life insurance had originally been purchased for the purpose of providing liquidity (cash) to pay estate taxes at death. However, through a combination of excellent estate planning and an increase, in 2009, of the federal exemption for estate taxes for estates up to $3.5 million, the insurance was no longer needed. Also, to keep this policy in force would require future annual premiums of approximately $50,000. In steps investors who offer to purchase the policy for nearly $300,000. The investors now own the insurance and will be responsible for paying all future premiums until the insured’s death at which time they’ll collect $1 million. The insured wins big because typically he would have surrendered the policy with little or no value. The investors, who purchase large baskets of these policies, expect to return a handsome profit on their investment.
What I have just described is called a Life Settlement and there are a number of guidelines that are involved in cases of this nature:
- The insured’s must typically be age 65 or older.
- The face amount of the life insurance policy must typically be at least $200,000. This is because the time and resources required are not case-size dependant and it’s not economical for smaller cases.
- The investors will require access to the insured’s medical records and have them reviewed by a medical actuary who determines the insured’s life expectancy based on his or her current state of health.
- Both term life insurance policies (that are convertible to permanent insurance) and cash value policies are eligible.
- Payouts vary based on the life expectancy of the insured.
Here’s the lesson. If you are age 65 or older, or know someone who is, be sure that he or she is aware that their life insurance policies could be worth thousands of dollars. As people become more elderly, sometimes they make less well thought out decisions and will allow an insurance policy to lapse because they no longer want or feel they need the insurance; can’t afford the premium; or simply forget to pay the premium.
If you do decide to sell your life insurance policy, be sure to get several quotes since offers from investors can vary widely. This is still a highly unregulated industry and you’ll need to get help from a trusted life insurance representative.