Did you know that there is a vibrant secondary market in which you may be able to sell your existing life insurance policy? Your first thought may be, “Why would I do that?” Believe it or not, there are many people who, for a variety of reasons, explore this transaction known as a life settlement.
Who Does This?
A person who no longer has a need for the life insurance he or she originally purchased would be a good fit for a life settlement. Take, for example, a business owner who bought a $2 million policy in 1996 to provide income for his wife and daughter in the event of his untimely death.
Fast forward to 2016, he and his wife now have plenty of savings. His daughter is married with kids and has a successful career of her own. If this business owner simply cashes in the policy, he would receive back only the surrender value, a figure that is well below the death benefit amount. If he sells the policy instead, he would still get less than the death benefit, but far more than the surrender amount.
Here is another example: We recently helped an older executive who was about to surrender his executive life insurance policy for $72,000 when he learned his former employer could no longer pay the $7 million premium. Through a life settlement, he received $2.7 million instead. Thank goodness a friend referred him to Howard Kaye!
How Does It Work?
There are people out there who may be willing to buy your life insurance policy as an investment alternative. For instance, let’s say you’re 65 and have been making $5,000 annual premium payments on a $2.5 million policy for decades. You decide you no longer need the policy, but you would like more than the $500,000 surrender value. An institutional investor may look at that policy and say, “I’ll give you 40% of the death benefit or $1 million now for that policy and continue making your premium payments for as long as you’re alive.”
The logic is that, at some point in the future, the buyer of your policy will collect the full $2.5 million death benefit. There is, of course, the chance that you’ll live past your life expectancy, thereby reducing the returns for the investor, who will need to continue paying to realize the ultimate return. That’s a gamble, though, that the investor takes when he or she offers you a life settlement. There is also a chance you will pass away shortly after your policy is bought, creating a larger return potential for the buyer.
In addition to advancing a percentage of the death benefit to the policy owner — which can typically range from 20-50% or more of the original death benefit depending on your age and health — there are other options available with a life settlement. The investor can offer to buy the policy and offer the original owner a “retained death benefit,” which is essentially the continuation of a portion of the original coverage without any additional premium required from the original policy owner. So, instead of offering an older or unhealthy client $1 million in cash, the investor could offer a retained death benefit of $1.3 million. This could be an attractive option for a client who likes the idea of having the life insurance at no additional cost.
Life settlement offers can also include a combination of cash now and a retained death benefit. The same policy owner often receives multiple offers from various institutional investors before making any decision. We are here to help you secure the best offers available, and then help you choose the solution that’s most appropriate for your circumstances.
Regardless of whether a life settlement is something you’ll ever choose to do, we want you to know your options. The sale of an existing life insurance policy can be used for any number of needs, ranging from retirement income to long-term care funding to gifting money to your kids. There are also important tax considerations to take into account. Call 800-DIE-RICH to contact the experts at Howard Kaye today, and let us review your current policy for you. We’ll show you your options and help unlock all of the value from your existing life insurance coverage.