Vast amounts of life insurance benefits are left on the table each year by policyholders. Many policyholders allow their life insurance coverage to lapse because they can no longer afford the premiums or they feel that they no longer need life insurance.

But there often are better options than simply allowing a policy to lapse. You are most likely to have these options with whole and universal life policies, which have investment components as well as death benefits, but you might have some options with term policies as well. For instance, it might be possible to turn a “convertible term” policy into a universal or whole life policy. The conversion generally must be completed by a certain age, however—often 65. Contact your ­insurer for details.

Four possibilities…

You could cancel your whole or universal policy (rather than allowing it to lapse) and claim its cash surrender value. That’s the amount your insurance contract promises you if you voluntarily terminate the policy prior to its maturity. This usually is an option with whole and universal life policies, but not with term policies.

Before choosing this option, call your insurance company and request an “in force illustration”—a projection of the policy’s value based on current interest rates and dividend assumptions. Does this report show that the policy’s ­“accumulated value” is higher than its “surrender value”? If so, you still are in your policy’s “surrender charge period” and must pay a fee to claim its ­surrender value. Skim the report to find the date when accumulated value matches surrender value—if it’s soon, consider keeping the policy in effect until this date arrives.

Tax implications: Although an insurance policy’s death benefit usually is not taxable, any cash surrender value you receive in excess of the amount that you paid in premiums will be taxed as income.

A “life settlement” company might be willing to buy your whole or universal life insurance policy from you for more than its cash surrender value. This company will continue paying your premiums so that it can eventually claim the death benefit. (Or it might sell your policy to a different company, which would then take over the payments and claim the death benefit.) These companies are most interested in policies belonging to people age 70 and up, though some will buy policies from people in their 60s, too.


• Regulation and oversight of the life settlement industry have improved over the past decade, but proceed with caution—there still are shady ­operators. There’s something to be said for working with one of the well-­established financial companies that has entered the business, such as Goldman Sachs or Credit Suisse.

• There is a creepy element to life settlement—the company that purchases your policy can contact you from time to time to ask about your health. If that company later sells your policy, these calls might come from a company that you don’t even know.

• Selling a policy to a life settlement company is not technically permitted under the terms of most life insurance contracts. No life insurance issuer is known to have taken action against a policyholder for doing this, however.

Tax implications: The IRS has not made a final ruling about the taxability of life settlements, but the guidance it has offered suggests that any amount received in excess of the policy’s cash surrender value is taxable as capital gain.

An accelerated death benefit might be available from your insurer. This is very similar to a life settlement, but it’s paid by your insurance policy issuer, so there’s no concern about the legitimacy of the company…no potential legal complications…and no creepy calls about your health. This option exists for certain whole and universal life policies.

Strategy: Speak with a life settlement company or two before calling your insurer to ask about an accelerated death benefit. Then tell the insurer, “I’ve heard from a life settlement company, and it says it can offer me $X for my policy. I would like to know if you, instead, could offer me an accelerated death benefit.” Cite the largest amount offered to you. This conversation sends a message to your insurer that you know what your policy is worth, which might inspire it to make a competitive offer.

Tax implications: Accelerated death benefits generally can be excluded from taxable income if the policyholder has a terminal illness and is not expected to live more than 24 months…or has a chronic condition that requires long-term care (consult your tax or financial adviser for details). Otherwise these benefits might be taxable as income.

Your beneficiaries might be willing to pay your insurance premiums for you. They eventually will benefit from your policy, so it is perfectly reasonable to ask them if they would like to help you keep it in effect. These payments by your heirs could potentially be subject to gift taxes, but only if the payments exceed the annual gift tax ­exclusion—up to $14,000 paid by each heir.

Choosing an Expert

If you ask an insurance agent or broker for help choosing among the options detailed above, be aware that his/her recommendation might not be truly impartial—he might receive a commission for steering you in a particular direction. A fee-only financial planner can provide an unbiased opinion, but planners often are not insurance experts.

The best way to obtain unbiased guidance from a true expert is to consult with a fee-based life insurance consultant. Examples include David Barkhausen (­ and Glenn S. Daily (, who is a member of the Bottom Line/Personal Panel of Experts. (Neither of these consultants has any financial arrangement with Bottom Line/Personal.)

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