Term life insurance coverage by design provides inexpensive premium coverage for millions of Americans to protect their estate, family, or businesses. But what happens once your guaranteed term period comes to an end?
You can convert your Term policy to permanent coverage such as Universal life or whole life coverage which will require considerably higher premiums to extend your coverage. Or if you are like most Americans who own Term life insurance coverage you simply decide to let the coverage lapse without value. As it stands today nearly 85% of Term life coverage never actually result in a death claim. (2019 ACLI Fact Book)
Enter the life settlement option. Term policy holders who are over the age of 65 and own coverage nearing its final years of convertibility have a 3rd option! Sell your policy in what is known as a life settlement.
In a previously published article (Unlocking the Hidden Value in Your Life Insurance-August 2020) we explored the life settlement option for consumers who are about to lapse or surrender a life insurance policy they own. And Term policies are a vital aspect of the life settlement industry.
A term life settlement is a great way to obtain some salvage value for a policy that would otherwise terminate without value. Buyers or Providers as they are called in the life settlement industry typically look to purchase policies on insured’s who are age 65 and above, have had some change in health since original policy issue and in the case of a term policy the coverage is still within its conversion privilege.
To find out more about your term coverage convertibility period a simple call into your life insurance carrier is all that is needed. Once you have confirmed your term policy is still within its conversion period there are dozens of life settlement buyers that will review your policy for possible life settlement.
For a consumer who wishes to investigate the life settlement option it can be a profitable alternative vs. lapse of their term policy for which they receive zero. There are over a dozen buyers in the settlement industry that will compete for the purchase of your policy. Since a life settlement generally takes several weeks to complete the process must begin weeks prior to your conversion period deadline.
- A retired 75-year-old male with a $1 million term policy could not afford to convert the policy that was nearing the end of its guaranteed premium and conversion periods. Since he wanted to keep some coverage in force, he was planning to convert a small portion of the policy, $100,000, and let the balance of coverage lapse. We were able to get him $28,000 in a life settlement by converting and selling $800,000 of the policy. He was able to convert and retain the $200,000 balance of the policy for himself. The proceeds of the life settlement covered over two years of the conversion premium which allowed him to keep a larger amount in force for himself than if he had simply allowed the policy to lapse.
Taxation of a life settlement is complex and depends on your life expectancy, how much you have paid in insurance premiums and how much you receive for your settlement. Your settlement may be treated as ordinary income or a capital gain for tax purposes. It’s a good idea to get tax advice from a professional before you commit to a settlement.
Typically, the final quarter of the calendar year is one of the busiest in the life insurance industry and many term policies have issue dates towards the latter quarter of the year in the fall. The policy anniversary date tends to be when policies are lapsed because their premium guarantee period ends, and it is also when the conversion privilege expires. These are critical dates for consumers who have purchased Term policies nearing the end of their guaranteed period to keep in mind for possible life settlement.
Life settlements are now highly regulated with 42 of the 50 states, covering more than 90% of the American population, having enacted legislation. This assures an orderly and more transparent marketplace.
As baby boomers retire, the need for retirement income can become acute and cash from a life settlement can be an important retirement income supplement. Seniors nearing the end of guaranteed term coverage period should not overlook this often-forgotten option of a life settlement for a policy you feel you may no longer need. It might just be one of the most important financial decisions a senior can make.