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Personal life insurance is property and may be sold, per the U.S. Supreme Court in 1911. For decades, policy owners across America have been selling their existing policies for cash. While there are many types of term, Convertible Term insurance is easier to sell than all other kinds of life insurance.
What you need to know:
Funders earn commissions and renewals when converting Term policies to Universal Life or Whole Life. Conversion income helps them buy more policies covering younger and healthier Insureds. This is why Convertible Term is the funder’s favorite for Life Settlements.
Funders rarely buy non-convertible Term policies unless the Insured is severely or terminally ill. When a policy loses convertibility, its Increasing Term Premiums may go up 8 to 30 times higher over time. This explains why only 1½% of Term policies are converted. Each Convertible Term policy has a mandatory deadline for conversion, beyond which the policy automatically becomes Increasing Premium Term with premiums that increase every year. In fact, the increase may become so exponential that the policy becomes unaffordable. Policy Owners should contact the insurance company if there is any question about when the conversion period ends. Get confirmation of this deadline by Email and USPS. Missing your conversion deadline may reduce or eliminate any offers.
Many Policy Owners incorrectly assume their policy will remain convertible as long as the premiums are level. Some policies are hard to understand on this crucial point.
Most Term policies are issued with a Conversion Privilege or Option which ends on a specific date. Most of these policies may be converted to Universal Life, which is less costly and more flexible than a Whole Life policy. If the policy is not converted by its deadline, it will eventually become an Increasing Premium Term policy. Such policies are salable only when the Insured is severely or terminally ill.
Term life insurance policies offer pure protection at the lowest price because they do not have cash values. Auto, property and health insurance do not build cash values, either. You pay premiums and on “maturity”, the carrier pays the death benefit. Term insurance has level (consistent) premiums and level benefits for a set period of time, usually 10 to 30 years.
A 10- to- 30- Year Level Premium Convertible Term policy will cost much less than Universal and Whole Life over the same period of time. Buying Convertible Term helps people buy a lot more coverage and put the savings somewhere else.
Who can sell their term life insurance policy?
All Life Settlement cases depend on the specifics of health, age, policy type and face amount, and gender. American Life Settlements has 3 Policy Sale Programs for Insureds who might live up to 23 more years, and 3 for those with a lifespan of 5 years or less. Convertible term policies are easier to sell than all other forms of life insurance. See our list of programs to find out the various options for selling your term insurance policy.
When should a convertible term policy be submitted for Life Settlement quotes?
A convertible term policy may be submitted for Life Settlement quotes at any time, ideally at least 12 months before the policy loses convertibility. Policy Owners should call the life insurance company if unsure when the policy can no longer be converted.
What are all of the Term insurance Life Settlement options?
If convertible, most Term life insurance policies may be sold for lump-sum of cash as a Life Settlement if the Insured may live up to 23 more years, or as a tax-free Viatical Settlement if the Insured will probably live 2 years or less per medical certification.
Convertible Term insurance may also be sold for a Retained Benefit Life Settlement which gives the option of getting some cash now and leaving some benefit later.
The Long-Term Care Life Settlement is another use for Convertible Term insurance by those receiving licensed Long-Term Care or needing some in 90 days.
A Convertible Term insurance policy may be used as collateral for a Private Policy Loan if the Insured might live 2 years or less.
Some Term insurance policies, whether or not convertible, offer an Accelerated Death Benefit for Insureds who will likely die within 6 to 12 months. This is a carrier-sponsored loan collateralized by the policy’s death benefit and requires premium support.
Why is it easier to sell a convertible term policy than any other kind of life insurance?
Convertible Term premiums may be 2 to 4 times cheaper than Universal Life policies and do not have cash values or loans. Life Settlement Funders receive commissions and renewals when converting policies to Universal Life as a part of the Life Settlement process. These conversion income streams help Funders buy a lot more policies, including those of younger and healthier Insureds.
Converting Term policies to Universal Life also lets Funders choose to pay the bare minimum premium known as Cost of Insurance, case by case. Certain Universal Life policies have an Extended Maturity feature that provides coverage out to age 121 or longer, enabling Funders to buy policies of older and healthier Insureds who might live to 100 or more.
Unfortunately, some Term policies can only be converted to Whole Life, making them much harder to sell for a Life Settlement.
When does a term policy lose its convertibility?
Some convertible term policies may clearly state when the conversion period ends, but others are hard to understand. Warning: conversion might end even though the premiums are still level. The Policy Owner should contact the insurance company if there is any doubt, and request confirmation by Email and USPS.
When term policies are converted, what do they become?
Almost all term policies are convertible to Universal Life but only for a specified period of time known as the conversion privilege or conversion option. Some term policies may only be converted to Whole Life, which is much more expensive and less flexible than Universal life.
What happens when a term policy cannot be converted?
If a term policy cannot be converted, its premiums will begin increasing at some point in time. Such policies ultimately become unaffordable. Life Settlement Funders are reluctant to buy most non-convertible term policies unless the Insured is severely or terminally ill.
What are the tax consequences of selling a Term Policy for a Life Settlement?
The Tax Cuts and Jobs Act of 2017 improved the Life Settlement marketplace by retroactively rescinding Treasury Ruling 2009-13. It restores the generally accepted treatment of Life Settlements used before this TR. Briefly:
These improvements were designed to reduce the numbers of individuals subject to the previous tax regime. They will revert to their 2017 levels (adjusted for inflation) beginning January 1, 2026, without Congressional action.
What does a term life insurance policy offer?
Term life insurance provides a death benefit regardless of cause. Many Term policies may be converted to a permanent plan of life insurance for a specific period of time. Most companies allow conversion only to Universal Life, while others restrict conversion to Whole Life. If the policy is not converted by the policy’s deadline, premiums will eventually increase and become unaffordable. For this reason, Policy Owners must know when the Term policy loses convertibility. Some Term policies offer an Accelerated Death Benefit, a loan subject to claim approval by the insurance company. The Insured’s Doctor must certify that death is probable within 6 months, though some policies allow 12 months. Premium support must continue after the Accelerated Death Benefit loan has been placed.
Does term life insurance have any cash value?
Term life insurance does not have any cash value. Neither does auto, property, or health insurance. Term’s low premiums allow people to buy a lot more coverage and put the savings somewhere else, outside of the policy.
Does Term Life Insurance expire?
Term life insurance will eventually expire, just as will every other kind of life insurance.
No life insurance stays in force forever.
There are three important dates with Convertible Term. One is the end of level premiums. Another is the end of convertibility, which may or may not happen before the end of level premiums. Policy Owners need to know exactly when the conversion is no longer possible by reading the policy or directly calling the life insurance company. When the policy can no longer be converted it will eventually become Increasing Premium Term.
Almost all of those policies expire at 100, having become unaffordable long before.
What is the price difference between converting to Universal Life or letting the policy become Increasing Premium Term?
Conversion premiums may rise 2 to 4 times when converted to Universal Life, depending on the age and gender of the Insured and the policy’s rating when issued. Premiums may go up 4 to 8 times if the policy is converted to Whole Life.
But, if the conversion does not take place and the policy eventually becomes Increasing Premium Term, premiums gradually rise before skyrocketing. 10-year Term policies issued since 2000 cost an average of 8 to 30 times more if not converted according to the Society of Actuaries in 2016. These facts explain why Life Settlement Funders find it difficult or even impossible to buy non-convertible term unless the Insured is severely to terminally ill. Only ½ of 1% to 15% of Term policies are converted, depending on the jump in premiums and the client’s ability to buy a better policy.
Does Term Life Insurance Pay Cash Dividends?
Today’s Term life insurance policies do not pay cash dividends. Many decades ago, so-called “Participating” Term policies of Mutual companies once paid dividends, but they were phased out because this form of Term life insurance was too expensive. Life insurance “dividends” are only partial returns of premiums, rather like a rebate.
Why would somebody want to convert a Term policy to Universal Life, rather than sell for a Life Settlement?
When a Term policy is converted to Universal Life, the premiums will be 2 to 4 times higher than the old Term premiums, depending on factors of smoking status, age, and gender.
The trade-offs are worth it for those with family and/or business concerns that clearly call for insurance coverage beyond 65. With Universal Life, there is some flexibility in the amount of premiums that must be paid, rather than the exponential price hikes of Increasing Premium Term.
The unique advantage of certain Universal Life policies is an Extended Maturity feature which can maintain coverage to age 121 or more, depending on required premium payments as detailed in the policy. The longevity trends are clear: In 2015 there were nearly half a million worldwide centenarians (people age 100 or more). In turn, that number was over four times as many as in 1990, per the United Nations. In 2016 Pew Research forecasted an 8-fold increase in centenarians. Individuals planning ahead for a very long life need to consider whether or not they should get a Universal Policy with the ability to “go long.”
Do some convertible term policies restrict conversion only to Whole Life and not offer Universal Life?
A small percentage of term policies can only be converted to Whole Life and the new premiums may be 4 to 8 times higher. Such converted policies are much harder to sell than Universal Life policies, where the new premiums may be 2 to 4 times higher. Universal Life offers Funders other options, such as flexibility on premium payments.
Can a Guaranteed Level Term Life Insurance policy be sold for a Life Settlement?
A Guaranteed Level Term Life Insurance policy could be sold if it could be converted to Universal or Whole Life. If the policy cannot be converted, it would only be saleable if the Insured were severely or terminally ill.
Can a Return of Premium Term Life Insurance policy be sold for a Life Settlement?
Return of Premium (“ROP”) policies are for a limited period of time, up to 30 years. If the Insured is still alive at the end of the term period, all the premiums are returned.
Such policies are not convertible. They are also more expensive than the same amount of level benefit Convertible Term. It would be theoretically possible to sell a ROP policy if the Insured were severely or terminally ill.
Can a Primerica Term Life Insurance policy be sold for a Life Settlement?
Only if the Insured were severely or terminally ill might a Primerica Term Life be sold for a Life Settlement. All Primerica Life insurance policies are Term, and they may only be converted to other forms of Term. No Primerica Life policy may be converted to Universal or Whole Life. As a result, Life Settlement Funders routinely avoid Primerica Life Insurance policies for the same reasons that they rarely buy any other Term policies that cannot be converted to Universal or Whole Life.
Does Term Life Insurance Count Towards Net Worth?
The ownership of Term life insurance does not count towards net worth.
From a simple accounting standpoint, net worth is the result of subtracting all debts and liabilities from the market value of assets. Term life insurance does not have any cash value, and thus does not count towards net worth. For that reason, Medicaid does not consider Term life insurance as an asset.
The only time a Term Life policy might be considered as a taxable portion of one’s Federal Estate would be if the policy were personally owned by an individual whose taxable estate in 2018 would be over $11.2 million dollars, the new individual Estate Tax Exemption per the Tax Cuts and Jobs Act of 2017. A $1 million personally-owned Term policy (or any life policy) would add $1 million to his or her Federal Estate. If a $1 million Term policy (or any life policy) were jointly owned by a married couple, it would add $1 million to their Federal Estate, but their exemption would be $22.4 million in 2018. Virtually all of such individuals would create an entity to apply for, own, and be the beneficiary of all life insurance policies. This technique removes “incidents of ownership” of life insurance policies. The standard entity is the Irrevocable Life Insurance Trust (“ILIT”). ILITs are typically constructed so as to allow policies to be sold for a Life Settlement. On tax matters, an excellent suggestion is to find an accounting professional who is also an attorney.
What does “Buy Term and Invest the Difference” mean?
During its specified time-period of coverage, such as 10 to 30 years of level premiums and level benefits, Term insurance will be cheaper than Universal Life or Whole Life. If the Policy Owner buys Term instead of Universal or Whole Life, the premium saving could be deposited or invested outside of the policy. When followed, this principle provides more cash while the Insured is alive, and more benefit after death. That is because the outside savings are separate from the policy. A $100,000 Universal Life policy with $20,000 of cash surrender value would result in a death benefit of $100,000. A $100,000 Term policy with a bank savings account of $20,000 would leave the beneficiary $120,000.
Insurance agents who favor Term Life Insurance have often described Universal and Whole Life as “Funny Banks,” because cash surrender value is not paid out in addition to the death benefit. Universal Life policies with an “Increasing Benefit Option” are constructed to sell more life insurance every year equal to the cash value, and the price of this goes up with the Insured’s birthdays.
Can Decreasing Benefit Term (Mortgage Insurance) be sold for a Life Settlement?
It would be impossible to sell a Decreasing Benefit Term Life Insurance policy unless the Insured was terminally ill with 2 years or less of probable life. Life Settlement Funders insist on level premium, level benefit product illustrations in order to make buying decisions.
Can an Accidental Death and Dismemberment Policy be sold for a Life Settlement?
Accidental Death and Dismemberment {“AD&D”) Term policies cannot be sold for a Life Settlement. All conventional life insurance will pay the death benefit for any cause of death after the 24-month Contestability and Suicide Exclusion Periods have elapsed. AD&D very narrowly restrict payments based on specific causes of death, such as public transportation.
These Term Life Insurance Policies might be saleable if the Insured is severely to terminally ill, despite not being convertible to Universal or Whole Life
Also known at Annual Renewable Term, Increasing Premium Term policies are much more difficult to sell than Level Term policies. Note that we did not say “impossible.” Once we have seen the premium schedule and know enough about the Insured’s medical condition, we will have a very good idea if a specific Increasing Premium Term policy might get bids.
For various reasons, these types of term life insurance cannot be sold for a life settlement.
Decreasing Term policies have level premiums but benefits that decline every year. Funders dislike such policies because they consider only level benefits for Term. These policies, unfortunately, cannot be sold for a life settlement.
These policies only pay death claims when the Insured dies in carefully described circumstances. Funders will not buy these policies. They only buy policies which pay benefits when the Insured dies for any reason.
Our comprehensive, 20 page ebook has industry facts, FAQs, qualification tables, the 4 steps to selling a policy, case studies and more.
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