June 26, 2020
Term life insurance is by far the most common type of life insurance in the U.S., more so than whole life or universal life policies. In 2020, according to the American Council of Life Insurers (ACLI), 74% of all new life insurance policies issued were term life based on the policy face value.
Only a surprisingly low 1-2% of all in-force term life insurance policies ever actually payout, and put another way, over $55 BILLION in term coverage is lapsed every year. By design, term policies are set to expire after a certain amount of time, but the life insurance industry group, Limra, found that one out of every 14 term life policy owners lapse their term life insurance policy every year.
Some of those lapsed policies could have been let go after the life insurance coverage had served its purpose, but many of those policy holders may never have known that they could have considered a life settlement or viatical settlement as an alternative.
Term Life Insurance Options
Life insurance policies can be confusing to understand, particularly all of the options and riders.
It is important to understand that policyholders have many options with their term life insurance policies, which provide a much greater level of flexibility than expected. Below, we review the most important facts that every term life insurance policy holder needs to know about their policy.
When the policy expires, there is no payout
When a term life insurance policy expires, or terminates, the life insurance company does not pay out the coverage amount (death benefit). Term life insurance is considered non-permanent life insurance, and it does not have or grow cash value. You can apply for a new life insurance policy, if you are in good health, just check with your life insurance agent and inquire about purchasing a new insurance policy.
Term policies do not automatically expire at the end of the term
One thing that can be confusing is that your insurance agent, financial advisor or life insurance company may give you the impression that the policy will automatically expire at the level term period. However, the policy can often be continued past that point, although at a much higher premium. Continuing may make sense, even with the higher premium payment, if your health condition makes you not meet the eligibility criteria for a new, replacement policy, particularly if you have a terminal illness.
So while the level term premium is expiring, the term insurance policy itself can still be kept in-force. A life insurance policy (whether term, whole life insurance, another type of policy) ends after the policy’s termination date, also known as the maturity date.
The insurance carrier must pay the named beneficiary
Even if your situation has changed since you took the life insurance policy out, the insurance company is legally obligated to pay only the named beneficiary(ies) on the policy. So it is important to keep your beneficiary information current (the correct dependent, loved one, business partner, etc.) with the life insurance company. You should also consider providing a contingent beneficiary(ies) in case something happens to your named beneficiary(ies).
Minor children cannot receive life insurance proceeds
Not directly— any life insurance payout proceeds paid to a minor child must go through a lengthy, and sometimes costly, probate court process to appoint a guardian until the child turns 18 (or the age of majority in the given state). Keep this in mind when you name a policy beneficiary.
Most term policies are convertible to permanent life insurance
Most term life insurance policies can be converted, up to a certain age or date, or until the level term period has passed. A permanent life insurance policy (e.g., universal life and whole life policy) is more expensive than a term life policy, but they often also accrue value over the course of the policy (in some cases, only if you pay in more than the minimum premium amount), which allows for a policy loan or partial withdrawal down the road if it is needed.
You can also convert a portion of your life insurance policy into a permanent policy – splitting the death benefit amount between term and permanent life insurance. A policy conversion is not subject to underwriting, so your health conditions are locked in from the time that the original policy was issued. A policy conversion is tax-free.
Term policies can qualify for a life settlement
Most people assume that since a term life insurance policy does not have any cash value, that the policy has no value. This is not true in every case, and increasingly seniors are learning about the value of your policy in a life settlement to tap the market value of their life insurance policy, including term life insurance. In a life settlement, the policy owner receives a lump sum cash payment for their life insurance policy.
Term policy holders often wonder if they could meet the eligibility requirements for a life insurance settlement. Term policies actually are eligible for a life settlement, and in fact can be better than a universal life insurance policy!
What is a Life Settlement?
A life settlement is a transaction where a life insurance policy holder sells their life insurance policy to a third party for more than the cash surrender value, but less than the policy’s death benefit. The original owner receives a cash payment in the amount of the life settlement offer, and the new owner pays all of the life insurance premiums moving forward.
Life settlement companies work with you to help you understand the entire life settlement process and determine whether your life insurance policy qualifies for a life settlement or viatical settlement. Life settlement companies – life settlement brokers and providers – help you cash out your policy and make life settlements work for you.
After a policyholder sells a life insurance policy in a life settlement transaction, the policyholder is no longer responsible for life insurance premium payments. In addition, the policy’s beneficiaries and your loved ones will no longer receive the death benefit when the policy payout is made. You can use the cash payment received however you see fit, whether that is to supplement your retirement income, pay off medical bills, or cover long-term care costs.
You can have comfort knowing that life settlement transactions are regulated, based on model acts issued by the National Association of Insurance Commissioners (NAIC). A life settlement provider will require disclosures and disclaimers, in addition to informing you about any waiting periods after the policy was issued before it can be sold (five-years in some states but there are exceptions).
Situations Change over Time
Your current situation is likely different than when you initially purchased your life insurance policy. All too often, a policy holder reassesses their financial situation and, once the kids are grown and the mortgage is paid off, the impending premium increases just don’t make sense any more. If you ask the insurance company what you can do, at best, they may offer to sell you a smaller term policy – if you are in good health and still insurable.
Make sure that you consider your options before letting your policy lapse. If you have a term life insurance policy that is no longer needed, wanted, or is nearing the conversion date, it may be a good idea to contact a life settlement provider or broker, licensed in your state, to evaluate your policy before you make a decision to let the policy lapse.
Too many term life insurance owners assume that since there is no cash surrender value that the policy would not have value in a life settlement, but many term policies still work for a life settlement. Another option to explore if your health conditions are poor, particularly if you have a chronic or terminal illness, is whether your policy has an accelerated death benefit rider. If it does, you may be able to get some or all of your policy’s face value paid out before you pass.
What is My Policy Worth?
The reason that a term insurance policy may qualify for a life settlement is that the value of the policy in a life settlement is not based on account value or cash surrender value. The value of your life insurance policy depends on your policy (premiums, face value, etc.) and your life expectancy. Your life expectancy is based on your health conditions (good health or issues?). We have a full blog article available that details how life settlements are valued.
The life settlement company will review your medical records to determine your health status, which will be important in determining your eligibility for a life settlement. The amount of a payout is quite a big range – from 5% to 50% of the policy’s face value.
Can My Client Sell A Life Insurance Policy Today?
Yes, your clients can sell their term life insurance policy for cash! You can get an instant estimate of the value of your client’s life insurance policy by visiting our life settlement calculator. You can also call LCX Life at 888-388-0988, contact us here, make an appointment, or email us firstname.lastname@example.org to discuss your client’s situation. Our team is available and ready to explain to you and provide you all the resources you need to talk to your clients about life settlements. LCX Life works with licensed life settlement and viatical settlement providers to get your client the best offer for their term life insurance policy.
Remember: Never let your clients abandon a life insurance policy without looking at the life settlement option first!