If you bought a life insurance policy many years ago but your policy premiums have become too expensive to maintain — or you simply don’t need it anymore — your inclination may be to let your policy lapse or surrender it for cash.
Many older consumers do not realize that they could be eligible for a life settlement instead, which entails selling a life insurance policy to an investor for more than the cash surrender value. The investor then takes ownership of your policy and pays your premiums, and later receives the payout upon your passing. This transaction lets you leverage your life insurance policy to access capital while you’re still living, and it’s most common for universal life policies.
Selling your life insurance can be a little complicated, especially to those who are new to the concept. To help you better understand how this works, here are four important things to know about life settlements that are often misunderstood.
1. You have many options other than surrendering your life insurance policy.
Many people who no longer want to pay their life insurance premiums don’t even realize that they have options besides surrendering their policy or just letting it lapse.
“I think most consumers are unaware that their life insurance policy is a financial contract that they actually own — it’s their personal property,” says Darwin Bayston, President and CEO of the Life Insurance Settlement Association. “As such, it’s hard for them to understand that they could actually take this financial contract and sell it to somebody else and exchange it for a value that’s built up inside of it.”
Most policyholders see their life insurance as something that’s there for their beneficiaries when they pass, not as a financial instrument they can sell for a value before they die, Bayston says.
He adds that if you can no longer afford your premium payments, there are more options available than just discontinuing your payments or getting a life settlement. You could also try to reduce your death benefit to get the premium lowered, get someone to loan you money against the policy so you can keep paying the premiums, or gift or give the policy to someone else, Bayston explains. However, selling your policy is the best option if you need cash, he says.
2. You don’t have to be terminally ill to get a life settlement.
Some consumers think that they must be terminally ill in order to sell their life insurance policy, but this is a misconception, says Cindy Poveda, President of Life Settlements for Mason Finance. Most businesses that are investing in buying life insurance policies are looking for those where the policyholder has a life expectancy of 10 years or less. Poveda says there could be some willing to go a little higher, but in general, 10 years is what investors are looking for, since that’s their ideal investment period.
She says this means a healthy 65-year-old couldn’t sell their policy, and it may even be difficult for a healthy 75-year-old who is expected to live beyond 10 years. Generally, there needs to have been a change in your health since the issuance of your policy, Poveda explains.
“A 65-year-old that’s really impaired and has an eight-year life expectancy is going to be a life settlement policy candidate,” she explains. “But a normal 65-year-old who’s got high blood pressure and some diabetes wouldn’t be considered since those are manageable items.”
If you were 75, you’d need to have health impairments that make your life expectancy shorter than an average healthy 75-year-old. “On the other hand, if you’re 85, you’re probably closer to a 10-year life expectancy, and you could be healthier” and still get a life settlement, she says. So the formula is more based on your health and age, but by no means do you need to be terminally ill to qualify for a life settlement.
3. It’s not as morbid as you might think.
Poveda says she’s seen some negative things written about the life settlement industry, claiming that it’s a morbid business that works by betting on someone’s death.
“I reject that since when an individual took out a policy, they were underwritten,” she says. “What do you think a life insurance company was doing other than looking at your health and deciding how long you’re going to pay the premium to support $1 million death benefit? They priced the product according to your health.”
She points out that the same thing happens with a life settlement; they’re simply pricing the policy based on the status of your health, and in this case, how long an investor is going to be paying your premiums. So she doesn’t buy the idea that it’s betting on death, since it utilizes the same model that life insurance companies use.
“These are institutional assets that are institutionally managed, so it’s not an individual investor who is hovering over you waiting for you to die,” Poveda explains. “You shouldn’t be selling to people like that! There are professional servicing companies who manage these things.”
Life settlements can be a little tricky to wrap your head around at first, Bayston says, but the value you can unlock could be far worth it.