Investing in life insurance is a good financial decision when you're younger: protecting your family is the most important thing you can do when you first have children. But now that you've retired, your situation has likely changed. Your kids are independent, your salary has been replaced by a mix of social security, pension payments, and drawing off of your retirement savings. If you are selling all or a portion of your business, you may even be overinsured.
The changing of financial circumstances is the reason why over half of seniors over 65 decide that their life insurance isn't needed anymore and surrender it back to the insurance company. If they have an accumulated cash value in a permanent policy, most seniors with cash in their life insurance and walk away from it. In fact, over $100 billion dollars of life insurance value held by people over 65 is turned back over to the insurance companies every year.
But many people do not recognize that there are other options with an unwanted insurance policy. In many cases, selling a life insurance policy can net a significant amount more than the cash value of the policy - often 2-8 times the amount.
Life insurance is considered your property - it's an asset you own, not dissimilar to your home. And just like your home, it can be sold to another party. When you sell your life insurance policy, it's transferred to the buyer (usually an institutional investor), which means the following:
Cashing it the policy is different - cashing in the policy means that the insurance company does not have to pay out the benefit of the policy when you die - and you only get what you've accumulated as savings (if any) in the policy.
In most cases, you should be able to sell any life insurance policy. However, you might not be clear on what type of policy you have and if there are other considerations.
Review these common types of life insurance and your options for leveraging them:
There are a mix of other types of policies that are variations of the above. Most importantly, all of them can be sold. A buyer will make an offer to you based on how much your premiums will be, how long they'll have to pay those premiums (in other words, the amount of time you have left to live), how much they'll receive at the time of your death.
Because this isn't a well known option for most people, selling a life insurance policy can be a pretty daunting experience. There are several ways to go about it, all with pros and cons. Here are the most common things you can do to start the process.
A good place to start is with your insurance provider. While insurance providers won't buy your policy, they can offer you alternatives to selling your policy, such as surrendering the policy, taking the cash value out of the policy, or using the cash value to pay your premiums, if that's an option. Insurance providers aren't a great place to go to get information about selling your policy, for good reason: if you simply surrender the policy, the insurance company gets to keep the premiums you paid into it for years, and they don't have to pay out the benefit when you die.
Your financial advisor may be a better place to start if you have one (and if you don't, it's worth it to pay for an independent financial advisor. We can help you find an independent financial advisor that focuses on post-retirement in your area). But even if you do have one, most financial advisors aren't familiar with this transaction, and often do not handle it themselves.
If you have a relationship with a bank, you might reach out to your banker or investment advisor to see if they know where to sell your life insurance policy.
As with most brokers, a life settlement broker doesn’t buy your life insurance policy. They do, however, have access to a network of potential buyer representatives (called "providers"). A broker might be able to get you multiple offers or find offers that you wouldn’t be able to find on your own.
Brokers also charge a commission - and they should. They are (in most states) legally required to represent your best interests and they put a lot of work into helping you get the best offer. But the commissions can be much higher than you're used to - up to 30% of the sale price of your life insurance policy. And even though (in most states) they are required to disclose the commission, they often make it hard for you to find or understand.
You want to read reviews for any broker you use. This will help you determine how reputable they are and whether they have connections that can help you.
Selling directly to a provider is like selling your house directly to a buyer; you "cut out the middle-man." The difference here is that understanding the value of your insurance policy is much more complex than the value of your home. Providers represent buyers, who are obligated to try to get the best price for the life insurance policies they buy.
The advantage of going to a provider is that you may be able to get your payout faster (in a matter of days, not weeks), and you don't pay a commission. But some of the bigger or more disreputable providers will offer you a fraction of what the policy is actually worth.
As with brokers, read reviews before you interact with a life settlement provider. You’re taking a big hit on your death benefit, so make sure you work with the best providers.
At Worthright, we may not be a broker or provider, and we don't buy your policy directly. That means that everything we do for you is free. What we do is the following:
As with any sale of property, make sure you're armed with all the information you need to make the sale. You don't want to leave money on the table. If you have any questions, don't hesitate to contact us and we'd be happy to help you think through the process.