#viaticalsettlement

The comparison between term life insurance policies and permanent life insurance policies like whole life and universal life was always that you were renting versus buying. Term policy premiums are normally much less expensive, but these types of policies aren’t permanent and expire after a set term.  You don’t wind up with an asset at the end of your rental agreement, so selling your term life insurance policy for cash is something that most people have never even considered.

Permanent insurance policies have a built-in cash value mechanism of varying sorts which is meant to offset increasing costs of your underlying insurance as you age, thus adding some semblance of permanence, whereas a term life insurance policy is just that, for a term. The policy term may be for 5 years, 10 years, or even upwards of 25 years. Usually, the premiums stay the same for the term and most term life insurance policies maintain the right of conversion to a permanent plan such as universal life. The conversion privilege allows you to convert your term life insurance to the permanent plan, but uses the health status you had when you originally applied for the term policy. According to a 1993 study by Penn State University, 99% of term life insurance policies never pay out in the form of a death benefit. Policies often lapse along the way as finances and insurance needs change and most policies are not converted, unless you have had some slippage in your health, making the rates you have locked into your conversion a bargain.

Can you cash in on a term life insurance policy? No, you cannot surrender your policy and receive cash from the insurance carrier for a term life policy.  Term insurance is a great affordable option, but does not build up cash value like permanent insurance. If you have a term life insurance policy, with no cash value account, you are expecting a cash value of zero at the end of your term. Nothing sinister from the insurance company happened, you simply paid the cost of insurance to make sure your insurance needs were met, without utilizing a cash building plan. The zero cash value you have in your insurance policy, is still simply what the insurance company is offering. Zero. 

Your policy may have a hidden value as a life settlement though, meaning that you may be able to sell your life insurance policy in the secondary market. Any cash you receive from your policy is considered tax free up to the amount that you paid into the policy over the years.

Sell my term life insurance policy for cash example:

A 55 year old man, Bob, is in good health can purchase a $1M 20 year term life insurance policy from an A+ rated insurance company for between $3,000 and $4,000 a year, guaranteed not to increase and assuring Bob's ability to convert the policy until a hypothetical age 75. (All companies are a little different with the time and/or age by which you have to initiate your conversion privilege and the details in your policy are important.)

Let's assume Bob kept his policy for 20 years and paid a total of somewhere between $60,000 and $80,000 in premiums, depending upon the insurance carrier he utilized, and is now turning 75 and must convert his policy. Bob's children are now grown. The loans he maintained on his business and home are paid and his nest is empty. Bob's need for insurance has decreased, likely as he planned it would.

Bob now has the option to get another policy if he needs it, cancel the one he has and function with no insurance, or convert the policy to a universal life policy (UL). Bob's health has slipped since he was assigned preferred rates when he purchased his policy 20 years ago as a 55 year old. Bob does not really need the insurance, but the cost of a smaller plan or new plan would be outrageous because of his health having deteriorated, if he could even get life insurance. The cost of the $1M UL is going to be $30,000 per year, which is nearly 10 times what he was paying for his term policy.

Bob is going to do what most people do. Legitimately rationalize that he 'rented' his term insurance for 20 years, was fortunate enough not to die and really does not need it any longer. Then, Bob will cancel.  If Bob's policy is still convertible to a universal policy in this example, there is almost a certainty that Bob will have a hidden value as a life settlement in the term policy he is about to discard, depending on Bob's health and the particulars of the policy.

It is not uncommon for a 75 year old male in reasonably good health to be able to sell their term life insurance for near the total in premiums they have paid for the policy over the years. If Bob was in good health, he might very qualify to sell his policy at a number that is close to what he outlaid. Because Bob's health has deteriorated to the point it has in this example, Bob could likely sell his policy for much more than he outlaid over 20 years and certainly much more than zero.

There are not a lot of 75 year olds that would say no to a tax free windfall of cash. To qualify to be able to sell your life insurance, it should be a convertible term life insurance policy or a universal life policy. Group, whole life, and other types of life insurance can certainly be sold, but typically require that you have had a significant decline in health.