Financing Your Retirement with Life Insurance
Life insurance can be a powerful financial retirement tool if used properly. Many of us purchased life insurance when we had a full-time job and a family to raise. After decades of hard work, our children have grown up and the need for a life insurance policy’s coverage has diminished.
The sad fact is that over 80% of life insurance policies in the U.S. are never paid out. The majority of policies end up being surrendered or cancelled. After years of collecting our premiums, the insurance companies are just being let off the hook.
The problem is that most individuals think of life insurance as an expense and not as an asset. Life insurance—like any other property you own—can be sold. The process is called a “life settlement.”
A life settlement transaction works like this.
- The insured receives an upfront cash payout from the buyer—usually a large financial institution.
- The buyer assumes ownership of the policy and pays the premiums going forward.
- The policy’s benefit is paid to the buyer when the insured passes away.
Life settlements help monetize an asset you may not have known that you had. It can turn an expense into a source of capital. Many seniors who sell their policy use the money to pay for home care expenses or to improve the quality of their retirement living.
Although life settlements are not appropriate for everyone (and we will discuss some alternatives below), we believe everyone should be aware of the option. This will ensure you can make a well-informed decision about your life insurance policy if the need ever arises.
Why Would I Want to Sell My Policy?
In general, you might consider selling your policy if your needs have changed and your policy no longer fits those needs. Many seniors purchased life insurance policies decades ago when their circumstances were different. Back then, the policy served to protect their children and families in case of an unexpected passing. After many years, that purpose may no longer be as relevant. Most reasons for selling one’s policy fit into one of the following three categories:
- Unaffordable Policy Premiums—Policy premiums that were affordable when you had a full-time job may no longer be as affordable on a retirement salary. Additionally, the cost of insurance increases with age and sometimes this can trigger increases in annual premium payments (a feature common in Universal Life policies).
- Large Upcoming Expense—The settlement amount can be used to pay for a large upcoming expense. For example, the most common uses are for retirement home expenses or medical bills. Others use the money to fund an underfunded retirement plan or to help pay for a grandchild’s college tuition.
- Unnecessary Coverage—If the policy was originally purchased to ensure the financial security of the insured’s children, it may no longer be necessary after many years. The kids may be fully independent and no longer need the safety net. Make sure to consider whether the annual payments are worth the financial security it buys.
Who is a Candidate for a Life Settlement?
There are three basic criteria for a life settlement candidate. These are meant to be a guide and do not guarantee that your policy could be sold. You should contact a life settlement broker to evaluate your case personally if you are interested, and this is a service brokers generally provide for free. Here are the basic criteria:
- The insured should be 65 or older. Those who are younger may be considered if they are in declining health.
- The policy’s benefit amount is greater than or equal to $100,000.
- The policy should be a whole life, universal life or convertible term life policy. Standard term life policies are usually not eligible.
How Much Money Could I Get For My Policy?
The average sale results in a settlement of approximately 20%-25% of the policy benefit amount. For instance, a qualifying $1,000,000 policy would yield a $200,000 to $250,000 cash settlement on average. Of course, what you could get is case dependent, but here are the general factors that would affect your offer:
- Age & Health—The single greatest factor is life expectancy, which is calculated based on your age and health. Generally, the lower the life expectancy, the more the settlement value.
- Policy Size—Larger policies tend to be worth more.
- Premium Amount—Policies with a lower premium amount relative to their policy size tend to have a higher selling value.
Alternatives to Life Settlement
Life settlement is not always the right option so it is important to understand the alternatives. Here is a general outline of options you can take with your life insurance. Remember, this is meant to give you a general understanding of the alternatives so please speak with a financial advisor regarding any decision you make.
- Withdrawals—You can withdraw part of the cash value that you have built up in your policy in exchange for reducing your death benefit.
- Loans—You can borrow money from your policy using the policy’s built-up cash value. If done correctly, you may not even have to pay it back (though it will reduce your death benefit).
- Using Cash Value to Pay Premiums—You can use your accrued cash value to pay down premiums. Some policies do this automatically if you skip a payment but you should contact your insurance agent to make sure.
- Surrender —If you have built up a cash value, you can surrender your policy to extract your cash value. However, a life settlement is generally a better option if you are seriously considering a surrender so make sure to evaluate both options.
This article was written by Lingke Wang, cofounder of Ovid Corp. Ovid Corp. is the leading life settlement exchange where consumers can sell their life insurance policy through our auction platform to institutional investors. For more information please visit www.ovidlife.com or call 800-311-OVID.