If you’re in your late 70s or 80s or in poor health and considering surrendering or lapsing your life insurance policy, there is an alternative that could net you tens or hundreds of thousands of dollars. Over 90% of life insurance policies will lapse due to a lack of awareness about the life settlement market according to the Life Insurance Settlement Foundation (LISA).
Life settlements typically happen when the insured no longer wants their policy or can no longer afford to pay their premiums. The insured can then sell their policy to an institutional investor whose prime business is buying life insurance policies.
What’s in it for the insured?
- No more premium payments.
- They can receive a lump sum cash payment today that they can use for anything they want. Vacations, Medical bills, LTC, really anything.
- Or their heirs can receive a part of the death benefit tax-free when they are gone.
The Cash payment would always be more than the current cash surrender value, but obviously less than the current death benefit. Any money received up to the policy’s tax basis (the total amount of premiums paid) will be tax-free, additional money received up to the cash surrender value will be taxed as ordinary income, and any money exceeding the cash surrender value will be taxed as capital gains. The new owners of the policy after the settlement continue paying the premiums and get the death benefit of the insured.
Why would someone sell their life insurance policy? They can no longer afford it, the policy is no longer needed (for example, if a company provided an employee with life insurance and that person no longer works at the company), or the owner needs cash fast for an unexpected expense.
Almost any type of policy can be sold, such as a term policy, a universal life policy, or a whole life policy. Typically, the more illnesses a person has, the more valuable their policy.
I have helped multiple clients sell their policies over the past 30 years. There are a lot of private investment funds that buy these policies and my job is to help my clients get the most for their policy, so we always start a bidding war between the buyers.
Here is an example of a policy I recently sold: The client was retiring from the City of Los Angeles with a 1.6M policy that the City was paying for when he was employed. He had the choice to take over the increasing term payments, convert it to a Universal life policy, or just walk away. He was 66 when he retired. He planned to let it lapse as he did not want to pay the $15,000+ premium to make the policy last to his life expectancy. His children also did not want to take over the premium. I shopped the case and received multiple offers, and then started a bidding war between the companies and almost doubled the original offer I received. The client walked away with $300,000. It was quite amazing for him and his family. Why was the amount so high? Because of his health situation, the buyer did not think he had a very long life expectancy, so they were willing to pay a lot.
If you ever consider letting your policy lapse or surrendering it for the cash value, it is a good idea to call me and let me see if your policy has any value to an institutional buyer.
As always call me if you have any questions or would like to review your tax, retirement, or estate plan. 310-417-9040.
The information above is not to be construed as tax, legal, or investment advice. That advice can only be provided by independent tax, legal, or investment advisors. CA Insurance License #0815028.