Traditional life settlement transactions (selling of an existing life insurance policy) have always involved permanent life insurance. The reason permanent insurance has been used is due to the policy being active for as long as the insured is alive with no expiration date assuming premiums are being paid on a timely basis. However, the latest trend is to settle level term policies.
Term settlements, also called term-to-perm settlements, involve settling level term life policies that have been converted to a permanent policy like universal or whole life. Most policies will be required to convert to a universal life policy versus whole life though. Usually, the conversion is done as part of this settlement transaction. So as long as the term policy has a conversation feature built into it, then it can be converted and settled.
Typically, an owner may convert his / her term policy to a permanent policy any time until the earlier of the level term period or the policy anniversary date following the insured’s 70 -75 birthday. This is completed without evidence of insurability or additional underwriting.
The standard requirements for life settlements still exist:
Most transactions now involve 10 to 20-year level term policies with at least a $500,000 death benefit that are close or very close to the end of the term. The insured usually faces the decision of whether to keep the policy, convert the policy, terminate the policy or sell the policy. If the insured terminates or sells, it is usually because the owner does not need the policy or cannot afford it.
Selling term policies will usually earn a “seller” between 1% – 3% of the death benefit. Of course, final offers will depend on the individual’s age, health conditions, prescription drugs usage, family medical history, etc. This works the opposite way of life insurance….the less healthy one is, the higher offer one will receive.
At a high-level, there are a few items that will be required upfront:
Term policies provide protection for a period of time with no intentions of creating any cash value buildup or asset. Over 95% of term life insurance policies are lapsed and never pay a death benefit. However, one can create liquidity by settling term life insurance policies when many individuals are tight on cash due to various reasons like poor economic conditions. These sales can help fund retirement expenses, provide long-term care needs or just provide the pleasure of using the funds for your own enjoyment.
If you would like more information or assistance with life settlements or other benefits, please contact:
Managing Director, Benefits Division