Did you know you can sell all or a portion of a life insurance policy, even term insurance?
(4 minute read)
Term life policyholders curious about selling the life insurance policy may have two possible options to get cash out of their term life insurance. One option is through a term life insurance surrender, and the other is selling the policy in a life settlement using a convertible rider. Let’s review both options.
Can You Cash Out a Term Life Insurance Policy?
When people consider “cashing out” a life insurance policy, they usually think about getting money back from the insurance company directly. This transaction is known as a life settlement surrender. In these agreements, the life insurance policy is canceled and the policyholder receives back a portion of the amount they have paid into the policy.
What is the Cash Surrender Value of a Term Life Insurance Policy?
Unfortunately, term life insurance does not have a surrender value because it is not a permanent life insurance policy. The “term” in term life means you only purchase the policy for a specific period of time. If the policy expires and the benefit is not collected, you don’t receive any return on the investment. The policy also does not accrue cash value when you are paying into it.
Can You Sell a Term Policy for Cash?
A term life policy can still be sold for cash if it contains a feature called a convertible rider. This is an option present in most term policies where they can be converted to permanent, whole-life or universal life policies, which do accrue cash value. The only caveat is permanent life policies have premiums that are anywhere from 5-15 times more expensive than term life. But when the time has come to sell the policy, you may be able to make the most of this option without having to pay the higher premiums.
How Does Selling a Term Life Policy Work?
Selling a term life policy through a convertible rider means the buyer converts the policy into a permanent policy and pays the premiums. It is even possible to only sell a portion of the term life policy to the buyer and keep the rest as a permanent benefit for yourself.
For instance, in one situation we helped a client get some cash back on his term life policy. A retired 74-year-old cancer survivor had a $1.5 million term policy. He was planning to convert a small portion of this policy, $100,000, as some coverage for himself to meet his current needs. Then, he would let the balance of coverage lapse.
We were able to get him $45,000 in a life settlement by converting and selling $1,200,000 of the policy. He kept $300,000 of the policy balance as insurance for himself. After the transaction, the proceeds of the life settlement helped pay off medical expenses and allowed him to keep a larger amount of life insurance coverage than originally planned as well.
Review more case studies of how we have helped clients achieve their financial goals through term life insurance settlements.
How Much Do You Get For Selling a Term Life Insurance Policy?
The average life settlement return in 2020 was 20% of the policy’s face value, according to the Life Insurance Settlement Association. But in some transactions, policyholders may receive returns of as much as 50% or more of the policy’s face value. The exact returns depend on the age and underlying health of the policyholder, and value of the policy, among other considerations.
92% of life insurance policies end without ever paying out the death benefit. This means the policies lapse because the holder doesn’t want to pay the premiums anymore or in some cases can’t afford to. I am passionate about increasing awareness of the opportunity for life settlements because they are a way for policyholders to achieve a competitive return on their investment in the policy. This is especially true for term life insurance!
Selling an unwanted life insurance policy is no different than selling your car, home, or any other valuable asset that will create immediate cash. Contact us today to learn more.
Life Settlement Advisors