Hidden Cash in Your Term Life Insurance Policy

For seniors facing mounting healthcare bills and other unexpected retirement expenses, the idea of hidden cash is attractive indeed. But short of a winning lottery ticket or a mythical money tree in the backyard, where would those hidden funds come from? The surprising answer: from an life insurance policy.

Despite increasing marketing efforts from life settlement companies and a growth in the volume of policy sales in recent years, many of the retirees who could benefit the most from a settlement are still in the dark about the option. They might be able to surrender a life insurance policy for cash value, but in many cases they opt to let a policy lapse and receive no value because they are unaware that a life settlement would be more profitable.

It’s common, as life insurance policies age, for the policyholders to reach a point where the beneficiary no longer needs the payout or for the premiums to increase. But years of investing in those policies don’t need to be wasted by lapsing. To discover the cash value hidden in a life insurance policy, it’s vital to understand the process of a life settlement, the potential tax consequences, and the different ramifications for universal versus term life insurance.

How a Life Settlement Works

In a nutshell, a life settlement is a transaction that occurs when an individual over 65 sells his or her life insurance policy to a settlement provider for cash, usually yielding considerably more than the surrender value of the policy.

The policy owner receives money to cover expenses, and the settlement company takes over the life insurance premiums and receives the death benefit upon the death of the insured. For example, if a person was holding a universal life policy with a face value of $1,000,000 and annual premiums of $35,000, that policy might yield about $300,000 in a life settlement—depending on the health status of the insured.

Settlement payouts are determined by several variables, most prominent are the health of the insured and the price structure of the policy. Not every situation is ideally suited for a settlement, but anyone hanging onto an unwanted policy should investigate the possibility that a higher yield may be possible through settlement than through surrender.

Seniors who are eligible for settlements often wonder how long it takes to cash out a life insurance policy. The first step is for a life settlement provider like Magna Life Settlements determines a person’s eligibility. Then the process includes submission of required insurance documents and medical records, after which a formal settlement offer is extended by the provider to the policy owner.

Typically the process takes a few weeks, but it can be longer depending on how quickly the insurance carrier can process the change of ownership and beneficiary forms. If retirement costs are mounting, a life settlement can be a quick and simple means to a cash infusion for those unexpected bills.

Life Settlement Taxes*

Before entering into a settlement an individual needs to understand how a settlement is taxed and how the 2018 tax bill has made such transactions more advantageous for the consumer. The proceeds from a life settlement are subject to three different tax classifications:

• Sale proceeds up to the tax basis (the total amount paid in premiums over the life of the policy) are free from taxation.
• Proceeds that exceed the tax basis but fall short of the cash surrender value are taxed as ordinary income.
• Proceeds above and beyond the surrender value are subject to capital gains tax rates.

The higher the cost basis for a policy, the larger the untaxed amount of the settlement will be, which is why one specific provision of the 2018 Tax Cuts and Jobs Acts was particularly welcome for consumers looking to sell their policies. The new law allowed consumers to make the best decision for their situation without concern about assuming an extra tax burden.

Which Policy is Best for a Life Settlement?

Many policyholders invest in term life insurance initially because of its affordability and flexibility; this type of policy can be taken out for terms of ten, twenty or thirty years. But because of the time limitations of a term policy, it must usually be converted to a different type of policy before it can be evaluated for a potential life settlement.

Many permanent types of insurance policies give consumers the option of withdrawing a portion of the cash value and may be suitable for sale in a settlement, so a term life policy owner might ask their agent about converting to one of those types.

Individuals whose term life insurance policies are approaching the end of the term should get all of the facts about converting the policy before that date comes. In one actual scenario, a 71-year-old policy owner with a $1 million, 20-year term life insurance policy would have seen a drastic rise in premiums, from $5,000 to more than $220,000. Because he was uninformed about the life settlement option, he lapsed his policy rather than pay those prohibitive premiums.

If he had opted convert his term policy to a permanent universal life product, the annual premium would have been $28,000, and if he no longer needed the insurance or wanted to quit paying the premiums he would have been eligible to sell his policy in a settlement for around $200,000.

Comments provided in this post are for informational purposes only and should not be construed as financial, legal or tax advice, recommendations or solicitations. Please consult your financial, legal or tax professional with questions related to the information presented, or for advice as to whether a life settlement is right for you.

How to Cash in Your Policy 

If life settlements are a new concept for you, you might be surprised to learn that they are simpler and more accessible than you might think. For anyone looking to get cash value out of a life insurance policy, a life settlement could be an option.

A Gallup poll showed 41 percent of Baby Boomers expect to be working beyond age 65. This dynamic is driving senior adults to seek new revenue streams to fund anything from travel to new investments to long-term care expenses.

According to research from the Insurance Studies Institute, more than 500,000 seniors lapse their life insurance policy annually, and only 1,250 take advantage of a life settlement. Ninety percent of seniors report that they would have considered a life settlement if they had been made aware of the option.

Magna’s specialists are available for both policy owners and their advisors to answer questions and illuminate the life settlement process. With just one simple step, seniors and their family members can learn whether their policy might be a candidate for a life settlement using our Life Settlement calculator. Magna also has numerous resources for financial advocates who wish to be better informed about offering the life settlement option to their clients.