Is Your Life Insurance Policy Worth More Than Its Cash Surrender Value?

When a life insurance policy is being lapsed or surrendered, a life settlement may make financial sense.
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By Michael Coben

A growing number of seniors are facing challenges to achieving financial security in retirement. From rising healthcare costs to the economic turmoil caused by Covid-19, financial stressors are leading even those who thought they saved enough for retirement to look for ways to bolster their income and savings.

Michael Coben

Michael Coben

Even in this volatile environment, many seniors may have a retirement income lifeline available to them – the sale of their life insurance policy. While many people may not be familiar with this option, it is gaining momentum in the market. When a person sells their policy, known as a life settlement, they receive an average of four or more times the cash surrender value of their policy. Life settlements can be a financial security game-changer.

Anytime a senior is not going to keep their policy, they should consider a life settlement so that they can get the most money when they terminate it. When a policy is lapsed, the policy owner receives nothing. When a policy is surrendered back to the insurance company, the policyowner receives little, if any, cash surrender value. Whether the policy is being lapsed or surrendered, a life settlement makes financial sense.

Changing Circumstances

There are many reasons why a person might terminate or sell their life insurance policy. Often the premiums become too expensive to maintain on a retirement income that is being challenged by current circumstances. Maybe the policy is just no longer needed. For example, many people buy life insurance when they have dependent children. Once the children have grown up and become financially independent, the need for the policy goes away.

Skyrocketing premiums for long-term care coverage have also motivated many people to consider selling their life insurance policies and using the proceeds from the life settlement to cover some or all of the costs of long-term care insurance. The National Association of Insurance Commissioners (NAIC) has endorsed life settlements as a way for seniors to plan and pay for long-term care expenses.

According to 2019 life insurance industry data, over 90 percent of life insurance policies (by face amount) that terminated in 2018 were lapsed or surrendered. In 80 percent of those cases, the policyowner received nothing in return for years of premium payments to the insurance company because they lapsed their policies.

Over the next 10 years, more than $2 trillion in life insurance policy death benefits that could qualify for a life settlement is projected to be lapsed or surrendered. Of this, some $850 billon is projected to be policies between $100,000 and $1 million.

Pursuing an Appraisal

To qualify for a life settlement, a person must generally be at least 70 years old and own a whole life, universal life, or convertible term insurance life insurance policy with a death benefit of $100,000 or more. While life settlements have traditionally been available only where the insured has developed a significant health impairment since the policy was taken out, today even those insureds without a change in health can qualify for a life settlement, depending on their age and the type and size of the policy.

If you think you may be eligible for a life settlement and are curious about the market value of your life insurance policy, your first step is to contact a life settlement company to get the policy appraised. Appraisals are completely cost-free to the policyowner, and usually require the policyowner to answer questions about the policy and the insured’s health status. Eligibility determinations are usually able to be made during the initial conversation.

Some life settlement companies take months to generate an offer to purchase a policy. They typically require full medical records to be collected and must obtain independent underwriting.

More modern and innovative life settlement companies have shortened the time it takes to evaluate a policy and make an offer to purchase. These companies collect health information through over-the-phone health interviews and reviews of prescription and diagnostic test results. This saves a significant amount of time and hassle and generates offers to purchase within a matter of days.

Real-Life Recipient

My company recently purchased the policy of a 77-year-old man who chose to pursue a life settlement. He owned a $500,000 universal life policy and had developed some significant health issues since originally purchasing the policy decades before. The premium required to keep the policy in force had reached an eye popping $24,000 per year.

The policyowner and his wife wanted to avoid dipping into their hard-earned retirement savings or burdening their adult children by asking them for money.

Initially, this couple was planning to surrender the life insurance policy to the insurance company for its cash surrender value of $9,200. Fortunately, their financial planner recommended that they get the policy appraised by our company first.

Our offer to purchase the policy was $95,000 - more than 10-times greater than the policy’s cash surrender value. This was great news for the couple, who sold the policy and have been using the proceeds to maintain their long-term care coverage while also adding to their retirement savings.

The difference between a policy’s cash surrender value and its value when sold illustrates the potentially life-changing impact a life settlement can have on seniors in retirement. If you don’t need or can no longer afford to keep your life insurance policy, having it appraised by a life settlement company makes perfect financial sense. A life settlement always pays more than either lapsing or surrendering your policy.

About the author: Michael Coben

Michael Coben is the chief distribution and business development officer for Lighthouse Life, based in Conshohocken, Pennsylvania.