By Matthew Lubanko
Your Money columnist
Q. I am 74 years old. I have a cash-value life insurance policy with a face value of $300,000. Because my wife and I have diligently saved for our retirement, we don’t feel we need the life insurance coverage anymore. We have asked our agent to convert the policy to cash, but the so-called surrender value is about $23,000. Is there another channel through which we can convert this policy to cash without taking a massive financial loss on the money we have already invested in the policy?
– H.G., Orlando
A. Thanks to people in circumstances similar to yours, a “life settlements” market has emerged over the last 10 years. The basic function of this market is quite simple: brokers and so-called providers find matching buyers for the sellers of cash-value life insurance policies. This secondary market for life insurance policies is governed by the laws, or absence of regulations, in individual states. Its value to you, the policy seller, often depends on your age, the face value of the policy you wish to sell, and the level of competition in the state where you live. (See http://www.securelifesettlements.com).
When the secondary market works efficiently, the following occurs: A provider agrees to buy your policy. The provider might pay you three times the surrender value the policy-writing insurer would pay for that same life insurance contract. The provider then bundles your policy with hundreds of other life insurance policies and resells it to institutional investors on a secondary market. “Institutions typically insist on at least 1,000 lives [individual policies] before they’ll consider investing [in a bundle],” said Sean McNealy, co-president of Advanced Settlements Inc., a life-settlements broker in Orlando.
But should you sell your policy?
That depends on many factors, including: How badly you need the cash; how you plan to use the cash; how much a buyer would agree to pay for your policy; and, most important of all, whether the policy is potentially more valuable if it stays in force.
Example: The $50,000 to $60,000 you might receive for your $300,000 life insurance policy might be a steal if you live for 20 more years or a major strategic error if you die within two years. How your decision to sell the policy pans out often depends on factors you cannot foresee or control.
“We often recommend that clients work in close consultation with an accountant or estate-planning lawyer. Selling a policy is never a cut-and-dried decision,” said Dan Ohman, vice president of Welcome Funds Inc., a life-settlements broker based in Boca Raton, Fla.
Here are a couple of points would-be policy sellers should consider.
Some of the cash you receive from the sale of your life insurance policy could be taxable, if the settlement exceeds the value of the premiums you have paid over the years. Securing a life settlement is hardly simple. The process — from basic planning to a policyholder’s physical to determine future life expectancy — often takes six to eight weeks.