What is Term Life Insurance?
There are two main types of life insurance: term life insurance and permanent life insurance.
Permanent life insurance, also known as universal life insurance or whole life insurance, accumulates in cash value based on the amount of premiums paid and interest rates. Interest rates fluctuate and can significantly impact the performance of universal life products, especially current assumption UL products. These policies are thus only “permanent” if properly managed over time. Otherwise, these policies can grow too expensive to maintain and are lapsed or sold on the secondary market. In comparison, term life insurance provides coverage for a set amount of time and usually for a specific purpose.
Why Do Consumers Purchase Term Insurance?
First, term insurance is generally more affordable than other types of life insurance. Because of this, if the choice is made to abandon the policy, less money in paid premiums is lost. However, just like any other type of life insurance, term policy cost of insurance charges increase on a yearly basis. Second, it’s an easy-to-understand insurance product. If the premiums are paid, the coverage stays in-force. It does not require management the way permanent life insurance does.
Term Policies Have No Cash Value
Term life policies have no cash value. These types of life insurance policies pay a death benefit to the beneficiary if the policyholder passes away within the policy’s timeframe. In any other scenario, term life insurance doesn’t possess any cash value. This means that a policyholder cannot withdraw money from their term life insurance, and it has no value if the policy is surrendered.
Term Insurance Can Have Value in the Secondary Market
In order to sell a term life insurance policy, it generally has to be converted into permanent life insurance. After a policy is converted, the value is determined by the policyholder’s age, health, premiums, and death benefit. While most life insurance companies allow policy owners to convert their policies, there may be some restrictions regarding age and the policy’s expiration date. If one possesses a convertible term life insurance policy and wants to allocate more funds towards retirement, medical expenses, or any other pressing needs, one has the option to convert their term life insurance policy and move forward with a life settlement.
Company-owned policy on a 72 year old retiring business owner. Due to the costly conversion premium, the company planned to lapse the policy. The retiring business owner negotiated for the policy ownership to be transferred to him.
Death Benefit: $2 Million, 20-year Term
Cash Surrender Value: $0
Life Settlement Value to Client = $630K
Individually-owned policy purchased as protection while the family was being raised. The policy owner is now 68. The children are grown and no longer need the benefit in the event of his passing.
Death Benefit: $500,000, 20-year Term
Cash Surrender Value: $0
Life Settlement Value to Client = $47,000
For more information on how the life settlement process works, and whether it is an option for you, give us a call or take our 7-question policy value quiz. Our team of experts is dedicated to asking and answering the crucial questions that will help you make informed decisions. Though a life settlement isn’t right for everyone, Ashar Group can be part of the process of determining whether it makes sense for your situation. Thank you.