Establishing the value of your life insurance policy involves many variables, but this valuation can have a substantial impact on your financial plan.
If you own a permanent life insurance policy and are trying to create a financial plan, you may be thinking, how much is my life insurance policy worth? And who would buy it from me if I wanted to sell it? Is it smart for me to sell my policy?
There are many factors that are used to correctly ascertain the fair market value of a life insurance policy. And calculating these factors is not always an easy task. The definition of fair market value is “the price at which a willing buyer is willing to pay to a willing seller for a given good or service.” But if you are trying to find out what your policy’s really worth, then you would be wise to enlist the help of a tax or accounting professional who has experience in this area.
And if you have term life insurance, then you are probably not a candidate for this type of analysis; it generally only applies to cash value life insurance. Term insurance has no cash value and only affords pure death benefit protection. Term policies differ from permanent policies in this aspect.
Policy Valuation Factors
Some of the factors that go into determining the value of your policy include:
- Face value – The amount of death benefit that the policy will pay is always a substantial factor in determining the value of a life policy. For example, a policy with a face amount of $1 million will be much more valuable than one with a face amount of $100,000.
- Cash value – The amount of cash value that has accumulated inside a policy is another key factor to consider, along with the interest rate that is being paid on this amount.
- Premiums paid – The total amount of premiums that have been paid into the policy are also taken into consideration when valuing a policy.
- Health, age and life expectancy of the insured – If you are not as healthy now as you were when you applied for life coverage, then this may raise the value of the policy, as the chance of the death benefit being paid out increases. Being older will do the same, as will having a lower life expectancy.
- Outstanding policy loans – If you have taken one or more loans out of your policy, then the value of your policy will most likely be reduced by these amounts.
- Type of insurance policy – A universal life insurance policy may be worth more (or less) than a whole life insurance policy or variable universal life insurance policy, depending upon various factors such as mutual fund subaccount performance or the rate of interest or dividends being paid.
Why Should I Bother to Find Out What My Policy is Worth?
Knowing the present market value of your policy can assist you in estate planning, especially if your total assets exceed the unified credit limit for the year. It is also necessary to know its value if you choose to gift it to another person or trust or are receiving the remainder of a policy under a split dollar arrangement.
The dollar value of your policy can dictate whether or not you will owe gift tax on your donation, sale or receipt of the policy. And, of course, if you want to sell your life insurance policy to a qualified buyer, then you’ll need to have an accurate idea of what your policy is worth in order to know whether you’re getting a good deal from the buyer or not.
Cashing In Your Policy
There are several ways that you can cash in your insurance policy without having to determine its fair market value (FMV). These include:
- Cashing out your policy – This is where you simply stop making premium payments into the policy and inform the life insurance company that you no longer want the coverage. You will receive the remaining surrender value in the policy after all surrender charges and other costs have been paid. There may be tax consequences if the amount you are left with exceeds the total amount of premiums that you paid into the policy.
- Using the loan provision – You can borrow money from your policy out of the accumulated cash value. The loan will charge interest, but you are essentially paying yourself. One big advantage to this type of loan is that there are no underwriting requirements of any kind. Just make sure that your loan doesn’t become so large that it causes your policy to lapse.
- Withdrawing the cash value – It is possible to just take out the current cash value from a policy without taking out a loan or canceling the policy. You may have to pay some surrender charges on this amount, especially if you haven’t owned the policy for very long.
The Life Settlement Option
Fortunately, there is a way for you to get a considerably better rate of return out of your life insurance policy than the previous three methods listed can provide. There are life settlement brokers in the marketplace today that specialize in buying life insurance policies from insureds who no longer want or need the coverage, or who need quick access to more cash now than they can get from a surrender, withdrawal or loan. Life settlements are quickly becoming the preferred method for disposing of unwanted life insurance coverage.
In this arrangement, the buyer will pay the insured a substantial sum of money up front (usually at least two or three times what they could get from a policy loan or withdrawal) and then become the policy owner, assuming the responsibility of paying the life insurance premiums. When the insured dies, the buyer receives the death benefit and the transaction is complete. But it is necessary to establish the fair market value of the policy in order to do this.
In most cases, the buyer will evaluate the policy according to a specific formula outlined by the IRS or state or federal laws. Different buyers may employ different formulas, so be sure to shop around a little and get a few different life insurance quotes before signing on the dotted line.
Establishing the true value of your life insurance policy is generally beyond the ability of most sellers to accomplish. Therefore this is usually done by companies that buy life insurance policies under life or viatical settlements. Consult with your financial advisor or life insurance agent for more information on how you can determine the value of your life insurance policy if you need to sell or donate it to another party.