Before You Cancel an Older Life Insurance Policy, Understand What It May Be Worth
If you pull out a life insurance policy you have owned for 20 or 30 years, you may find yourself asking a simple question:
Do I still need this?
Maybe your children are now financially independent. Maybe the mortgage has been paid off. Perhaps your spouse has passed away, or the premiums no longer fit as comfortably into your budget as they once did.
Many people assume they have only two choices: continue paying for the policy or cancel it.
Depending on the policy and your circumstances, however, there may be another option worth understanding: a life settlement.
What Is a Life Settlement?
A life settlement is the sale of an existing life insurance policy to a third party.
You receive a lump sum of money. The buyer takes ownership of the policy, generally assumes responsibility for future premiums, and ultimately receives the death benefit when you pass away.
That last point is important. You are not receiving money while keeping the insurance. Once the policy is sold, you are generally giving up ownership, control, and the death benefit that otherwise would have gone to your beneficiaries.
A Simple Example
Imagine someone who is 68 years old and owns a $500,000 permanent life insurance policy.
Their children are financially independent, their spouse has passed away, and the premiums have become increasingly difficult to justify on a retirement income.
The insurance company says the policy has a cash surrender value of $35,000. However, a third-party buyer offers $115,000 to purchase it.
At first glance, the larger offer may seem like the obvious choice. But that does not automatically make selling the policy the right decision.
The policyowner is not simply comparing $115,000 with $35,000. They also need to consider:
The $500,000 death benefit they would give up
The future premiums they would no longer need to pay
Potential taxes and fees
Whether the death benefit still has an important role in their financial plan
The policy may still be protecting someone’s income. It may be part of an estate plan, or the death benefit may have been intended for children, grandchildren, or a charity.
Then again, those needs may no longer exist.
That is why the review should begin with one central question:
What job is this policy doing today?
Do Not Simply Let the Policy Lapse
Another mistake is allowing an older policy to lapse without first reviewing it.
Someone receives a premium notice, decides they no longer want to pay it, and simply stops. But before doing that, they should ask:
Am I walking away from an asset that may still have value?
Depending on the policy, there may be cash surrender value, potential market value through a life settlement, or other options available within the contract.
If the policy has loans or gains, allowing it to lapse could also potentially create tax consequences.
Understand the Trade-Offs
Life settlements come with several important considerations.
There may be significant fees and potential tax consequences. The process can also require giving a third-party access to certain medical and personal information. Determining whether an offer represents a fair price may not always be easy.
Anyone seriously considering a life settlement should understand the fees, verify that the people involved are properly licensed, and potentially obtain multiple offers instead of accepting the first one presented.
Ask Better Questions Before Deciding
The decision is not simply whether to keep the policy or get rid of it.
Instead, consider:
What is the policy worth to me and my family today?
What does it cost to keep?
What would I receive by surrendering it?
Could it potentially be sold?
What are the possible tax consequences?
What protection would I give up?
If you have an older life insurance policy sitting in a drawer, do not assume you need to keep it forever, but do not automatically cancel it, either.
Pull out the policy. Obtain its current values. Understand what it is costing you and what purpose it still serves. Then compare the available options before making a decision.
An older life insurance policy is not merely an insurance contract. In some cases, it may be an asset, and you should understand what that asset is worth before giving it up.
If you would like help reviewing how an existing life insurance policy fits into your retirement and estate plan, visit caserta-dejongh.com or give us a call.
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