Reason 1: The Policy is No Longer Needed

This is the first installment of the Ashar Group series, “Reasons to Sell a Life Insurance Policy for Cash.” Our series encompasses the following topics: “The Policy is No Longer Needed” (found in this article), “Premiums Are Too Expensive,” “Changes in Health,” “Retirement Planning,” “Term Policy Approaching Expiration,” and “Business Term Insurance, (Retiring).”

With life insurance, not only does a family gain financial security, but also peace of mind. That being said, certain conditions can render a life insurance policy unnecessary and expendable.

Sometimes, there comes a point in your client’s life when he or she is better off selling their life insurance policy for cash. The following situations and conditions are examples of when a life settlement may be a wise alternative to continuing to pay for a life insurance policy.

When estate protection is no longer imperative

Financial planner at Affluencer Financial and instructor at UCLA, Samuel Rad explains in The Wall Street Journal that “many people were sold large life-insurance policies with the promise that the policies would pay off their estate tax when they passed away.” However, the Tax Cuts and Job Acts (TCJA), passed in December 2017, has increased the estate tax exemption. The IRS pronounced the 2018 federal estate and gift tax limit $11,180,000 and double the amount for married couples. Furthermore, children are now able to inherit nearly $22.4 million without taxation. Ultimately, this means that the insurance policy your client is paying a substantial amount for may now be expendable.

It is also common for estate values to decrease over time. Many individuals give to their family members annually or make annual donations to charity, both of which can minimize one’s estate tax. Liquidating one’s life insurance policy, after all, opens up opportunities to spend money elsewhere.

If dependents no longer need the benefit

While it’s understandable for families with young children to put their name down for life insurance, parents to financially independent adults should evaluate the prospects of a life settlement. In all likelihood, one’s grown children are self-sufficient and experienced enough to figure out their own financial affairs. Selling one’s own life insurance policy can help all family members maintain personal and financial independence.

How life insurance is effected by divorce

Greg Depersio of Investopedia writes that “among the messy tasks that must be undertaken in a divorce, sorting out life insurance is one that often gets overlooked.” The majority of married couples list their spouse as the primary beneficiary. When the couple getting a divorce is without children, the life insurance beneficiary is usually renamed.

If you know a policyholder going through a divorce, you could make the recommendation that they sell their life insurance policy. Depersio argues “the most equitable thing to do is to list the life insurance policy, including its cash value, among the marital assets to be divided.” You can find more information about the financial consequences of divorce here.

Case Examples

Planning Scenario

Policy was no longer needed to protect the estate. Her attorney suggested an independent appraisal of life settlement value to help make an informed decision about the disposition of the policy.

Planning Decision

She decided to sell her policy on the secondary market and apply the settlement proceeds and the cost of annual premiums to other planning needs.

Planning Scenario

In the process of going through a divorce. His estranged spouse was getting the policy as part of the divorce proceedings. The wife was trying to determine if it made any sense to keep paying the annual premium. Her CPA recommended an independent appraisal of life settlement value to help her make an informed decision.

Planning Decision

She decided to eliminate the premium obligation and sell the policy on the secondary market for $64,000.

Death Benefit: $20 million Death Benefit: $250,000
Policy Type:  Guaranteed Universal Life Policy Type: 20-year Convertible Term
Gender and Age: Female, 86 Gender and Age: Male, 73
Cash Surrender Value: $247,157 Cash Surrender Value: $0
Issued: 2006 Issued:  issued preferred in 2001
Premium: Annual premium 957,321 Premium: Annual premium $1900
Health: Substandard health for her age Health: Health declined after the policy was issued.
Life Settlement Value = $ 10,521,000 Life Settlement Value = $64,000

As Forbes contributor Larry Light remarks, “one of the ironies of insurance in general is that it’s essential, but we hope to never need it.” To learn more about the benefits of selling one’s life insurance, contact us.