Before You Let Your Life Insurance Lapse, Consider Selling It

Before You Let Your Life Insurance Lapse, Consider Selling It Most people think that their life insurance policy has no value until they die. But a market is emerging for buying and selling existing life insurance policies. If you currently own term or universal life coverage that you no longer want or need, you may be able to sell your policy and realize some cash value from it. 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.

Selling a current universal or term life insurance policy to a settlement company could be an effective strategy for raising cash immediately. 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 (Income based on the claims paying ability of the insurance company). 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 monetary 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 out of 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 the underlying cash value of the policy, according to the Viatical and Life Settlement Association. For term policies, the value of a life settlement transaction, in many cases falls between 10-30% of the policy's face value.

In either case, actual results will vary, depending upon the insured's age, life expectancy, and policy face value.

What should you be aware of when considering a sale of a life insurance policy?
Generally, you must be at least 65 years old, and the face value of your policy must be at least $200,000. 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.

Sources: September 21, 2004, The Wall Street Journal, Life Insurance for Sale-in a Secondary Market; October, 2004, The Nebraska Lawyer, The Secondary Market For Life Insurance: Tools For Estate Planning Practitioners

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