Just Surrender or Die? Unlock life insurance value with a Life Settlement
Updated: Feb 26, 2020
Life insurance professionals, advisors, CPAs, attorneys, estate planners and individuals have been conditioned to think there are only two liquidity options for a life insurance policy - (1) surrender the policy and collect the cash surrender value (if any) or (2) die and the beneficiaries collect the death benefit proceeds.
A tax-free lump sum payment after the death of the insured works well for the beneficiary(ies); however, it often doesn’t happen.
Why? Many life insurance policies are surrendered or lapsed before the insured dies.
The reasons for a life insurance policy not maturing in a death benefit being paid generally come down to three:
There is no longer a need for the life insurance coverage
The required annual premium payments become too expensive
The policy owner decides to surrender the policy for the cash surrender value (if no cash surrender value, then the life insurance policy lapses)
Unless the policy was designed investment-oriented (purchase the lowest possible death benefit for the planned premiums), life insurance policies can feel like a waste of money. If you evaluate life expectancy and the probability of death, life insurance is a long-term investment generally paying death claims well into the insured’s eighties, and sometimes, into an insured’s nineties. Most life insurance policy funding designs result in a negative rate of return if the policy is surrendered.
Life insurance, based on various life expectancy, generally provides a very competitive investment return when the policy matures in a death benefit. The problem on investment return is when the policy is surrendered for the policy cash surrender value.
There is another liquidity option to just surrender or die . . . it's called a Life Settlement
Any life insurance policy owner where the insured is older (generally age 65+) or has had a significant change in health since the policy was issued should evaluate a life settlement BEFORE surrendering a policy or allowing the policy to lapse.
A life settlement is a transaction where the life insurance policy owner sells their policy to a third-party in exchange for a lump sum cash payment. In exchange, the buyer takes over policy ownership and all future premiums. The seller no longer has any interest in the life insurance policy.
Insured Age: 75
Death Benefit: $1,000,000
Annual Premium: $20,000
Cash Surrender Value: $32,000
Life Expectancy: 84 Months
Life Settlement Value: $205,000
A life settlement provides a market value of $173,000 more than a policy surrender. In other words, the policy owner can sell the policy for $205,000 versus surrendering the policy for $32,000.
Contact us today if you are interested in evaluating a life settlement. We offer Policy Valuation services to help advisors and clients understand the market value of their life insurance policy. A proper life settlement process involves proper due diligence and a bidding process to provide the best possible economics for the seller.
See "Life Settlement Taxation Clarified by the New Tax Law" to learn more about the taxation of a life insurance policy life settlement.
The above analysis is based on the economic results for a hypothetical client which is based on assumptions impacting results which may not be guaranteed. The economics associated with each individual client are unique and impacted by the insurance product acquired, the performance of the life insurance policy, timing of premium payments, medical underwriting for the insured(s), and the actual life expectancy of the insured(s). The sample analysis is not intended to be opinion or advice on legal, tax, accounting or investment matters. Private counsel should be consulted prior to application of this general information to specific situations.