Don’t Throw Out That Old Life Insurance Policy

Bill, a friend and client who turned 65 recently, called to tell me that he is cancelling some of his life insurance. He said that the kids are grown up and on their own; the house is paid off; and his retirement account is healthy. He had $2 million of term insurance with another 5 years of level premium left and two $250,000 permanent policies. One was whole life with dividends covering the premium. The other was an old universal life policy that he had stopped funding and was going to “run out of steam” within 5 years.

His idea was to drop all coverage except for the $250,000 policy that seemed to be self-funding for life.

After further discussion, I opined that his plan made sense except for one thing: I suggested that we make sure he wasn’t “throwing out” something of value by dropping $2.25 million of coverage.

“It’s valuable only if I’m dead,” he said.

“Not necessarily so,” I retorted.

Long story short, Bill received $150,000 cash and $500,000 of paid-up death benefit by selling his $2 million of term insurance and $250,000 of universal life insurance to a life settlement fund.

Life insurance policies, even some term policies, can be sold on the “secondary market.” The transaction is called a life settlement. The buyer, typically an investment fund, pays cash for the policy and becomes the owner, beneficiary, and payor of the policy. The insured merely remains the “life” on the policy. Sometimes in lieu of a cash payment, the seller receives the irrevocable right to designate the beneficiary of the policy for a set dollar amount. For example, the sale of a $1 million policy may produce a $250,000 retained death benefit for the seller. In essence, the seller sold the $1 million for a “paid-up” death benefit of $250,000. It is possible to receive some cash and some retained death benefit in a sale.

So remember, don’t cash in or lapse a life insurance policy without first investigating the potential value that may exist. Otherwise, you may be throwing real money into the trash.