Chapter 2: Should I Keep my Life Insurance Policy?
Yes! Keeping an existing life insurance policy will provide the greatest benefit for your heirs.
However, as Grigsby v. Russell demonstrated, life’s circumstances can change. Sometimes, changes are expected. An example is coverage purchased to protect a family from the loss of a breadwinner’s income. At some point, the need for protection may diminish – the children have left home, established their own careers and families. Or changes can be unplanned and unexpected, such as financial difficulty or a need for long term care.
Each individual’s situation is a unique case. Consider the reasons you purchased the insurance coverage. Evaluate your circumstance today. If your life insurance policy is no longer needed or has become unaffordable, look more closely into the options available to you.
What are the most common reasons to consider selling?
The specific circumstance and reasons individuals have for selling their life insurance policy vary considerably one person to the next. Nonetheless, most transactions fall broadly into the following categories, one of which might match your situation.
Your policy premiums are no longer affordable
You may find yourself unable to support ongoing premium payments. This may have occurred due to a decline in income or because other financial needs have taken a priority. Or the policy itself has become more expensive, perhaps because the interest crediting rate has trailed the assumption utilized at the time of purchase. In other cases, the insurance company has raised the cost of premium payments to keep the policy in force.
Funds are needed for medical expenses or assistance with daily living
There are plenty of reports reviewing the rising cost of health care, and this is a factor for some. More often, funds are needed to pay for certain treatments, medications or therapy costs which fall outside of a coverage plan. For others, the need for the services of a home health aid or an assisted living facility create a more immediate need for cash.
The policy’s risk protection is no longer necessary
Through the years, the risk protection a life insurance policy has provided may no longer be necessary. In this scenario, beneficiaries no longer rely on the expected benefit for financial security. Some family related examples are empty nests, where children have grown and established their own families, loss of a spouse or divorce. Changes in estate planning, perhaps related to updates in estate tax projections, fall into this category. As does the sale of a business, and protection associated with a buy-sell agreement, for example. Where there is more than one policy on the same insured, we commonly see the sale of one policy to fund a remaining policy.
You are looking to reduce your cash outlay and supplement retirement income
Sometimes the decision to sell a policy is related simply reducing your annual financial outlay. Eliminating policy premiums can free cash for other purposes, whether simply creating some cushion in the retirement budget or funding lifestyle expenditures.
The time period to convert your term to permanent is closing
Most term life policies offer a conversion window, a feature of the policy that allows the term contract to be converted to a permanent policy without additional underwriting. Typically, these windows close at the end of the policy term and include insured age restrictions. Policy owners must decide whether to continue the term policy on an annual renewable basis, convert to a permanent policy or end coverage.
The common denominator in choosing a life settlement
Those who elect to sell a life insurance policy have in common a preference for current benefits, a lump sum of cash, which outweighs need for a future benefit, the policy payout. Each individual weighs their options carefully, each situation unique to circumstance. The key here is to know your option and make an informed decision.
What are my options?
If you have a life insurance policy that is no longer needed or has become unaffordable, there are several different options available for consideration.
Discontinue payment of premiums; lapse policy
If you discontinue premium payments, the policy coverage will lapse. For a permanent policy, premiums will be paid from the cash value, if any, until exhausted, at which time the policy coverage will terminate.
Surrender policy to the life insurance company
A permanent policy may be surrendered for the accumulated cash value of the policy. Surrender charges may apply, and amounts will be detailed in your policy contract.
You may be able to borrow against your policy by taking a loan, using the the cash value as collateral. The loan amount cannot exceed the amount of the policy’s cash value. While this strategy may make available cash, it does not eliminate the need to continue paying premiums. The loan amount, and any accumulated interest charges, are deducted from the death benefit payout.
Accelerated death benefit riders
Some policy contracts include a feature that allows the insured, in certain circumstances, to receive a portion of the death benefit immediately. The portion of the death benefit available and under what conditions will be detailed in your contract. Typically, benefits are available to those with a terminal or chronic condition resulting in a short life expectancy.
Premiums assumed by beneficiaries or family
In some cases, the beneficiaries or family members may wish to assume the premium obligation and keep the policy in-force. This alternative relieves the premium burden for the owner and maintains the future death benefit.
The sale of a life insurance policy to a third party for more than the cash surrender value, but less than the death benefit, this alternative provides a lump sum of cash today and elimination of the premium obligation. The purchaser of the policy assumes the premium obligation and will collect the death benefit in the future.