Selling Your Life Insurance Policy
Many financial advisors are completely unaware that clients who no longer need their life insurance policy—or who can no longer afford to pay the premiums on the policy—might be financially better off by selling their policy on the life settlement market.
There are numerous reasons why policy owners sell their policies in the life settlement market:
- Can no longer afford to pay premiums on the policy
- No longer need life insurance
- Need money to pay for long-term care, medical treatments, etc
For these policy owners, life settlements offer a great means to cash out their life insurance policy and receive significantly more compensation than if they were to simply cancel the policy and walk away.
What is a life settlement?
According to studies by the Society of Actuaries, nearly 50% of all owners of permanent life insurance end up cancelling their policy within 10 years. In fact, a study by the Wharton School of Economics revealed that nearly 88% of all universal life insurance policies never pay a death benefit. While this is great for the life insurance company, who get to collect premiums on these policies while never having to pay a death benefit in return, it’s not such a great deal for life insurance policy owners. These policy owners often end up losing tens of thousands of dollars—if not more—when they cancel their policy.
A life settlement is a regulated financial transaction in which the owner of a life insurance policy decides to sell his policy to a third-party institution instead of cancelling the policy. When a policy owner sells his policy, he no longer has to pay any of the premiums owed to the life insurance company. The policy owner can either receive cash for his policy or a part of the death benefit at a future point in time when he dies. In many cases, the policy owner can receive both cash and a part of the future death benefit.
In exchange for giving the current policy owner a payment for the policy (either a cash payment or a part of the future death benefit), the buyer of the policy receives the death benefit on the policy (or a part thereof) when the current policy owner dies.
In a life settlement, a policy owner sells his policy in exchange for a cash payment (or a future part of the death benefit). The buyer of the policy agrees to take on all future premium payments and receives the death benefit when the original policy owner dies.
Matthew is an 80-year-old male widower who lives alone and is experiencing mild dementia. He has recently had a few falls and is now having trouble moving around and taking care of himself. Matthew and his two adult children have decided that it would be better for him to move into an assisted living facility where he could receive more individual care and attention. Matthew is looking to liquidate some of his assets to pay for the care. He purchased a $1M life insurance policy 20 years ago. The premium payments on the policy have increased and the insurance company suggests that Matthew make a $60,000 annual premium payment on the policy each year to keep it active. The life insurance company says that if Matthew decides to cancel the policy he will only receive $89,000 for it even though he has paid $114,000 in premiums for it since he purchased the policy.
Matthew’s life insurance agent informs Matthew that instead of cancelling the policy he might be able to sell the life insurance policy on the life settlement market. The life insurance agent decides to act as a broker for the policy and takes the policy to a regulated life settlement provider. The life settlement provider offers Matthew $209,250 for the policy. Matthew decides to sell the policy on the life settlement market for $209,250 and uses the proceeds to pay for his assisted living needs.
Life Insurance vs Life Settlement Payouts
The table above shows the significant increase in payment Matthew would receive if he chooses to sell his life insurance policy on the life settlement market versus just cancelling the policy. If Matthew choses to cancel the policy he walks away with only $89,000 even though he paid $114,000 worth of premiums into the policy. However, if he chooses to sell the policy on the life settlement market he would receive $209,250 which is more than twice what he would get if he just cancels the policy.
Why should I choose Colva as a consultant to help me with this process?
One of the problems with the life settlement industry is that life insurance agents and brokers that work with policy owners get exorbitantly high commissions for helping the policy owner sell the policy on the life settlement market. This commission can be anywhere from 15% to 30% of the actual purchase price that the life settlement provider pays to purchase the policy. This is an exceptionally high percentage. For comparison purposes, when you sell a house you typically only pay ~6% in commission fees.
In the previous example, we saw that Matthew received $209,250 from the provider for selling his policy. The agent who helped Matthew sell the policy received $73,750 for only a few hours worth of work. This amounts to a total purchase price being paid of $283,000 and the policy owner only receiving 75% of that.
Colva on the other hand focuses directly on showing clients how to maximize value. The first step in Colva’s client relationship is to perform a holistic policy review for a flat fee which shows clients actuarial techniques that can save them tens of thousands in premiums on the policy if they decide to keep the policy. If the client chooses to sell the policy on the life settlement market, Colva works with the client to get them the highest offer price possible and assesses the client a flat fee that is fully disclosed to the client.
Cash payouts using Colva’s services vs average life settlement broker
The chart above shows that Matthew would have received 29% more (an extra $60,430 by using Colva’s services as opposed to a typical life settlement broker. Current life settlement brokers charge 15% to 30% of the total purchase price as a commission fee. Colva’s fee based services amount to less than 5% of the total purchase price in this example.
*Colva’s life settlement services in helping client’s sell policies in the life settlement may not be available in all states.