[Guide] Selling Your Life Insurance Policy
In the 1911 U.S. Supreme Court case of Grigsby v. Russell, the Court ruled in favor of Dr. Grigsby after the physician was denied the rights to a life insurance policy that he acquired from a patient in exchange for medical attention. The individual sold Grigsby his policy for $100, and the doctor continued to pay premiums on the policy until the patient’s death.
Unfortunately, Grigsby was denied the benefits of the plan after the patient’s death because the executor of the deceased’s estate deemed the transfer of ownership as an unlawful wager on life, and therefore against public policy. Dr. Grigsby took his claim to the Supreme Court which ultimately ruled in favor of the doctor and affirmed a policyholder’s property interest in a life insurance policy and corresponding right to assign benefits as he or she pleases.
The Grigsby case was significant as it paved the way for the creation of the life settlement industry in the United States.
What you will learn:
What is a life settlement?
A life settlement is the sale of an inforce life insurance policy for a market value return. Policyholders receive more than the cash surrender value of their policy but less than the death benefit at maturity. The market value depends on the age and health condition of the insured, but often is in the range of 6-8 times the surrender value.
Who takes advantage of settlements?
Senior citizens who no longer need or can no longer afford the premiums on their life insurance policies and have immediate cash needs are the most typical sellers in the life settlement market. Although many individuals over the age of 65 take advantage of life settlements, it is estimated that over $1B per year in policy value lapses and is therefore lost each year. This relative lack of knowledge about options to lapsing or surrendering a policy is why spreading the word about the life settlement industry is so important.
When should a policyholder seek a payout?
Life settlements are ideal when you have an insurance policy that you no longer want or can no longer afford. The settlement option is also better when you are short on cash and need significantly more than what the insurance company is willing to pay for a surrendered policy. Families and senior citizens can alleviate financial burdens by selling insurance policies on the secondary life settlement market. Improving your economic standing may be one buyer away.
Should you sell your life insurance policy?
Most people purchase life insurance to provide financial protection for those who you leave behind, and they expect to pay premiums as long as they are alive.
It turns out that this is not always the case. While it might sound counter intuitive, there are some legitimate financial reasons why you may want to sell your life insurance policy. The life settlement market is heavily regulated in the U.S. to ensure that policies that are sold are legitimate and owners are treated fairly in the transaction. Those wishing to sell their policies usually work through brokers who represent the seller and take a previously agreed-upon commission.
Once the buyer is identified and a purchase price negotiated, the buyer pays for the policy, usually by wire transfer to an intermediary, and then the takes on the responsibility of paying the premiums on the life insurance policy until maturity, at which time they collect the benefits.
The idea of selling your life insurance policy while you’re still alive may seem more appealing to you if you realize that in the majority of cases life insurance companies don’t pay out claims on life insurance. Many people pay a monthly or annual premium for years for a product that they eventually allow to lapse, never having received any benefit from the bargain. In many cases there is no reason to let a policy simply lapse.
People sell their life insurance policies for many reasons, among them:
1. They don’t need the coverage. People buy life insurance to provide protection for their loved ones if they die early. However, with the passing of time, their children and other dependents may become financially independent. They might not need your insurance to protect them financially if you die.
2. Some people may have saved up enough retirement money to be basically self-insured. At this point, the monthly premium pay out for a life insurance policy is counterproductive. Selling a life insurance policy and getting the market value now means that a person’s estate value is increased in their lifetime.
3. For some retirees, paying monthly life insurance policies gets too expensive. This is especially the case with policies that have a premium that increases as you get older. Retirees in these circumstance must compare the cost of completely giving up their life insurance policy, thereby having nothing to show for the years of premiums paid, vs. the benefits of not needing to pay a monthly premium and getting an upfront, discounted payout.
4. They need cash now for medical reasons. Some people have urgent medical or senior needs that they cannot cover with their current assets.
Selling your life insurance policy is not for everyone. But for those for whom it makes sense, a seller can take something they no longer need or can afford, and which didn’t felt more like a liability than an asset, and turn it into cash for the pressing needs of today. Selling your life insurance policy can help make you more financially secure today and give you the flexibility you need during retirement years.