David Rosell, founder of Rosell Wealth Management, Bend, Oregon, and host of the podcast Recession-Proof Your Retirement. He is author of In the Know: Turning Your Unneeded Life Insurance Policy into Serious Cash. RosellWealthManagement.com
Life insurance policies that were prudent decades ago can feel like financial sinkholes after premium increases. Here are options to consider when you no longer need a life insurance policy…
Keep the policy, and continue paying its premiums. If you can no longer fit the premiums into your budget, perhaps your heirs would be willing to pay them if they are the policy’s beneficiaries.
Keep the policy, but reduce the death benefit. Contact the insurer to find out how far your death benefit would fall if your premiums were lowered sufficiently to fit your budget.
Surrender the policy. This cancels the coverage and allows you to claim the cash value you’ve built up in the policy, less surrender fees and/or outstanding loans. This only applies to non-term policies such as whole life or variable.
Sell the policy through a “life settlement.” You typically must be at least 65 years old. Companies in this sector generally are interested only in policies that have death benefits of at least $250,000. Life settlements are most common with whole, variable and universal life policies, and possibly with a term policy if it can be converted into permanent insurance.
Options for terminally ill policyholders…
Accelerated death benefits. Terminally ill policyholders often can claim the lion’s share of their death benefit while still alive. But policyholders sacrifice a significant chunk of their death benefit to receive the money just a little sooner. It could be worth considering if cash is needed to pay medical or other bills.
Viatical settlements are comparable to life settlements except that they’re offered only to policyholders who are near death. They’re rarely worth considering—buyers in the viatical settlement sector typically make lowball offers.
To choose among the options: The calculations can be complex and depend on uncertain factors such as how long the policyholder is expected to live and whether the premiums will continue to increase. Rule of thumb: Either continuing the policy or continuing it with a reduced death benefit almost always yields the better financial result.
Life settlements make financial sense mainly for policyholders who have no viable way to pay premiums and whose only other option is to walk away from the policy. Note: If a policy is sold, the portion of the life settlement that exceeds the total amount the policyholder has paid in premiums will be taxed.
To pursue the life settlement option…
Ask your financial advisor to recommend a pro in the sector. Or your state’s department of insurance might be able to point you to a list of professionals licensed to offer life settlements.
Avoid life settlement providers you see advertised on TV—anecdotally, the companies that use TV ads seem to be among the least reputable in this sector.
Ask the life settlement provider, “What’s your bidding process?” It’s a good sign if it is a multistep process that seeks offers from several potential buyers…then returns to bidders to see if they can beat the best offer.
Accept a life settlement only if the net amount you would receive after fees and taxes is substantially greater than your policy’s surrender value.