Life expectancy has been steadily climbing in the United States. According to data from the Federal Reserve Bank of St. Louis, the average life expectancy for most Americans was 71 in 1970 and 75 in 1990. Today, the average American reaches the age of 78.
Longer lives mean more time to enjoy retirement, but retirement is getting more expensive. From the cost of owning and maintaining a home to increasing amounts spent on healthcare and home care as you age, it’s often challenging to make ends meet.
Life insurance may add to this financial burden. Consider joint life insurance policies, which pay out after both spouses pass away. For many couples, joint life insurance plans were purchased decades ago as part of estate planning. Changes to their financial circumstances may make these policies unnecessary, but they’re stuck paying premiums every month.
Instead of continuing to pay for insurance they don’t need, there’s another option: life insurance settlements. This approach converts your policy into cash, effectively funding your retirement with life insurance. Here’s how it works.
WHY PEOPLE LET GO OF JOINT POLICIES
Joint policies provide a measure of security, but changing circumstances may render them unnecessary. Common reasons for letting go of joint polices include:
- Changes in estate tax rules: Historically, estate taxes required significant financial liquidity. Without joint life insurance, spouses ran the risk of leaving their children with large tax bills. However, changes to estate tax rules have increased exemption levels, meaning fewer families need this liquidity.
- Financially independent beneficiaries: Older couples may have financially independent children who do not need the cash payout provided by joint life insurance.
- Unaffordable premiums: For retirees on a fixed income, joint life insurance premiums may become unaffordable, especially if they are in declining health and require more care.
- New priorities: Retirees may also have new priorities beyond keeping cash in life insurance policies. For example, they may need money to fund travel plans or prefer a more stable monthly income so they can live comfortably.
YOUR OPTIONS WHEN YOU NO LONGER NEED THE POLICY
If you no longer need your policy, you have three joint life insurance options:
1. Let the Policy Lapse
This choice is simple: You stop paying your premiums. As a result, your coverage lapses. While you may get some money back in surrender value, the amount is less than if you proactively surrender your policy. This sentence is unclear to me, needs to be clarified.
2. Surrender the Policy
You can also choose to surrender your policy. In this option, you cancel the policy with your insurance provider, and they pay you what’s known as the cash settlement value. This value is significantly less than the face value of your policy and may also be subject to fees or taxes.
3. Sell the Policy in a Life Settlement
The final option is a life settlement for your joint survivorship policy. Instead of cancelling your policy, you sell it to a third-party buyer who pays you a lump sum. On average, settlements pay four to seven times more than the surrender value.
Once sold, the buyer becomes the beneficiary of your policy, and they are responsible for all premium payments. A settlement lets you augment your retirement income, take on necessary house projects or maintenance, or pay for long-term care with life insurance proceeds.
LIFE SETTLEMENTS IN ACTION
An example may help to illustrate what it looks like to fund your retirement with life insurance.
Consider retired couple Kate and George. To improve their long-term financial security, they purchased a $1.5 million second-to-die policy 25 years ago. A recent review of their investments and assets, however, revealed that their estate falls below taxable levels. In addition, their three grown children are all financially stable.
Kate and George choose to sell their policy through a broker and receive $250,000 in cash, which they use to pay for assisted living needs and fund retirement travel plans.
WHY A LIFE SETTLEMENT CAN BE THE SMART CHOICE
Choosing a joint and survivor life insurance settlement option can be a wise financial move for joint policyholders.
First, settlements help maximize value compared to a lapse or surrender. In the case of a lapse, you receive no cash for your policy — you simply lose coverage. If you choose cash surrender, you will get some value from your policy, but significantly less than a negotiated third-party sale. Life settlement brokers shop multiple buyers to create competition and help you get the best value for your policy.
Settlements also happen on your timeline. When your financial needs shift, you can contact a broker to initiate the sales process and help put cash in your pocket. It’s also worth noting that settlements are regulated transactions. Brokers have a fiduciary duty to provide transparency for clients, and there are protections in place to ensure policyholders are treated fairly.
QUESTIONS TO ASK BEFORE SELLING YOUR JOINT LIFE INSURANCE POLICY
Before you sell your joint life insurance policy, ask yourself four questions:
- Is coverage still needed for estate or legacy purposes? If you will pay estate taxes or your beneficiaries are depending on life insurance benefits to ensure financial stability after you pass, you may want to keep your policy active. If you are under the estate tax threshold and your children are financially independent, consider a settlement.
- Can I comfortably afford current premiums? If current premiums are tough to afford on your retirement income, consider selling your policy for cash. You won’t pay any more premiums and will receive a lump sum, letting you fund retirement with life insurance.
- Would a lump sum improve my retirement or healthcare options? If a lump sum would give you more money to meet retirement goals or offset the cost of healthcare, it’s worth talking to a life settlement broker.
- Do I know what my policy is worth? Your policy may be worth more than you think. Before you decide to keep or sell your joint life insurance, talk to a licensed broker to understand your policy’s value on the market.
YOUR POLICY, YOUR CHOICE
If your joint policy has outlived its usefulness, it doesn’t have to be a financial burden — there are second-to-die insurance alternatives. By working with a broker, you can get more money for your policy and use the cash to fund current care needs, plan retirement adventures or simply provide peace of mind.
Bottom line? It’s your policy, your money, and your choice
Have a joint life policy you no longer need? Don’t let it lapse without understanding its true value. Contact a licensed life settlement broker for a free policy review today.
