When planning estates, life insurance can be an important component. But if a policy lapses there’s inherent complexity and risk.
There are instances in which the insured may need money, or their circumstances change, and life insurance is no longer necessary. Selling that life insurance policy is a viable option, but it is critical to understand the process before making this financial decision.
Sometimes, it’s better to stop paying for a life insurance policy if it reaches a point where it no longer yields good financial results, according to Tama Brooks Klosek of Klosek & Associates and Treyled Life Settlements in Houston and Michelle Graham of Withers Worldwide in San Diego.
In addition, the Community Foundation can provide insights on the benefits of naming it a charitable beneficiary under a life settlement. Such a move while intricate can represent a much larger tax deduction than simply donating a policy. It also allows the insured to see their contribution immediately benefit charity and it’s they could use the tax savings to purchase a less expensive policy.
Many life insurance policies that could be sold each year end without paying out any benefits. In 2023, only 3,213 policies were sold through life settlements, even though around 500,000 policies could have been sold this way.
For example, a 75-year-old winemaker who had a life insurance policy in a trust owed $2.4 million to a lender, but the policy was only worth $1.3 million if he cashed it out. The winemaker couldn’t pay the extra $1.1 million needed. However, his lawyer found a life settlement broker who sold the policy for $4,051,000. This paid off the debt and left extra money for the winemaker. Life settlements often pay four times more than the policy’s cash value, according to Klosek and Graham.
The idea of selling life insurance isn’t new. The U.S. Supreme Court allowed it over 100 years ago. But some insurance companies prefer policies to end without paying benefits because it’s more profitable for them, Klosek and Graham wrote.
Since wealthy people live longer, life insurance is less likely to pay out in these cases if the person lives past their policy term. About 88 percent of all universal life insurance policies are surrendered or lapse before paying any benefits.
Selling a policy through a life settlement can be more valuable than letting it lapse or cashing it out. Life settlement brokers are fiduciaries and must act in the seller’s best interest, unlike buyers who focus on getting the policy for the lowest price. And, of course, the Community Foundation can help brokers, and the insured understand how they can use life settlements as a philanthropic vehicle.
Life settlements can help save and make money from life insurance policies that might otherwise end without paying any benefits, Klosek and Graham wrote.
