Term life policies can be unloaded to unlock liquidity — but only under specific conditions and circumstances
While life settlement transactions are generally associated with universal life insurance policies, there are certain cases where they can also make sense for term life policy holders, particularly those who have moved past the need for coverage.
“Term policies make great life settlement candidates because of their very nature. They are typically bought for an insurance need that is temporary,” noted Robin Weinberger and Peter Katz of Life Insurance Settlements Inc. in a piece published by ThinkAdvisor.
As the duo noted, term life insurance holders should also be more eager to unload their policies as they would have no cash value once they lapse. However, there are certain considerations to determine whether a term insurance policy can be sold as part of a life settlement.
“Most life settlement buyers will only consider term policies that are convertible to some form of universal life,” they said, explaining that premiums of term policies typically skyrocket once they go past their initial premium guarantee. Conversion privileges vary from company to company, with some limiting it to a certain number of years and others imposing a maximum age.
“The variability of conversion periods is a significant factor in missed term life settlements,” they said, stressing the need for advisors to keep track of when level paying periods will lapse and when conversion privileges will expire.
The fact that a term policy is non-convertible is not necessarily a deal-breaker. Policies where an insured is facing a serious terminal illness and has a short, highly predictable life expectancy can be appealing to a life settlement investor, even if they come with high premiums. In such cases, the seller of the policy would typically have an immediate need for cash and no other source of liquidity.
“[B]efore contemplating a life settlement on a terminally ill insured, it’s imperative to determine if the policy has an accelerated death benefit rider and whether or not that would be a better alternative,” Weinberger and Katz advised.
Term life insurance policy holders may also want to consider selling just part of their coverage. If allowed by their insurer, they can do a partial conversion of their policy, effectively splitting off one portion that they can sell in a settlement.
“The remaining policy can be kept by your client as term insurance or be converted separately,” the authors said. “This can be a huge opportunity with a term life settlement.”
