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Term life insurance policies fulfill an obvious need in the market, helping people with a specific need for life insurance for a set amount of time. They’re a great “just in case” option, and one that the policyholder shouldn’t have to continue paying for after the need is no longer there.
Yet it can certainly feel like you’re letting a lot of money simply wash away after the need is gone or the term expires on the policy. That’s why term policies don’t always get the credit they should—it may sometimes be difficult to justify the investment in them when there’s no ROI whatsoever.
That’s a big misunderstanding, though. Term policies can provide ROI. It’s just that more often than not, individuals and/or advisors don’t think about the option that can make the policy fruitful.
The Convertible Rider
Odds are, when the policy was sold, it included a convertible rider that allows the policy to become permanent. It’s a great safety net for someone who may have become uninsurable during the policy’s term. But that rider can do more: it allows the policy to be sold in a life settlement, providing return that otherwise simply wouldn’t exist.
What is a Life Settlement?
A life settlement, or viatical, is the sale of a person’s life insurance policy to a third-party investor. In a life settlement, the policy’s owner transfers the ownership of that policy in exchange for an immediate cash payment from the buyer. Candidates for life settlements are typically 70 or older, with a life insurance policy that has a “face value” (death benefit) of more than $100,000.
Mr. Nixon, a retired father of three, had a convertible term policy with a death benefit of $3.5 million. The term was expiring, so he was debating letting the policy lapse. Yet his advisor suggested exploring a life settlement.
He converted the policy, and then sold it in a life settlement for $350,000. Just imagine…. he was going to let the policy simply lapse, and get nothing in return. Instead, he received $350,000 to invest in other, more lucrative investment opportunities.
Every case is different, but the options certainly beat the alternative of letting the policy lapse.