Insurance companies make a lot of money from people who cancel their life insurance policies. Think about it. you pay them for 20 years, they pocket the premiums, you cancel the policy and they never have to pay out anything because you cancel the policy before you died. To be on the winning end of this transaction, at least for the sake of your family, do not cancel your life insurance policy. If in fact you need to cancel your policy in order to save money or get the cash, there is another option. That option is a life settlement.
Most people think that their life insurance policy has no value until they die. But a market has emerged for buying and selling existing life insurance policies. If you currently own term or universal life coverage that you no longer want or need or cannot afford, you may be able to sell your policy and realize some cash value from it using a life settlement.
What is a life settlement?
A life settlement transaction involves selling a current life insurance policy to a life settlement company, who then pays the premiums and is named as the beneficiary on the policy. When the policyholder dies, the company receives the payout from the insurance company.
Before you let your policy lapse, selling a current universal or term life insurance policy to a settlement company could be an effective strategy for raising cash immediately. note that term insurance has no cash value. So if you cancel it, you will get nothing from the insurance company. But it may have value to a buyer who will continue to pay the premiums and eventually collect the death benefit.
The proceeds from the sale of a policy could be used to fund an immediate annuity that will provide monthly income for the rest of your life, or to pay premiums for long-term care insurance coverage, or more urgently, protect your house from foreclosure . In cases where the insured is still healthy, the proceeds could also be used to purchase a paid-up single premium life insurance policy.
Should you consider a life settlement?
If you no longer need the coverage provided by your current life insurance policy, or you just don't want to pay the premiums anymore, a life settlement could help you realize more value from your policy as opposed to surrendering the policy for the cash surrender value or, in the case of many term-policies, from letting your policy lapse and getting nothing from it.
How much could you realize from the sale of your life insurance policy?
Universal life policies can potentially be valued at three times or more of the underlying cash value of the policy, according to statements by the Viatical and Life Settlement Association. The value of a life settlement transaction averages 20% of the policy's face value. In other words, if you have a $100,000 policy, typical value is $20,000. Actual results will vary, depending upon the insured's age, life expectancy, and policy face value. the older the insured, the higher the policy value because the buyer will collect the death benefit sooner.
What should you be aware of when considering a sale of a life insurance policy?
The typical life settlement candidate has a life expectancy of between 2 and 12 years. The best prospects for such transactions are age 65 or older, have experienced a change in their health and are insured by a policy with a face amount of at least $100,000. It may not be a good idea to sell your policy if you know you will need the coverage to provide support to a surviving spouse or other dependents after your death. (Some settlement companies require that the current beneficiary endorse the sale of the policy.) Plus, once you arrive at an advanced age, you may find replacing your current policy either impossible or financially impractical.
Note: you could also be a buyer of these life settlement policies which can make very attractive investments and we will cover this in a separate post on uncommon investments.