How to Access the Treasure in Your Old Life Insurance Policy

Now Warren Buffet wants to buy your life. Well, not actually your life, just your life insurance policy. You have to hand it to Wall Street, in the last 10 years; they are packaging everything from commercial lawsuits to individual life insurance policies together in “investment bundles” and selling them to institutional investors. And investors, Warren Buffet’s Berkshire Hathaway included, are doing some big time buying. If fact, 13 billion dollars of unneeded individual life insurance policies were sold to investors last year.

Why you ask, would someone sell the ownership of their life insurance? Well, first, there is the money. The policy owner, by selling now, generally gets about 50% of the death benefit as cash now (depending on age and current estimated longevity) to be used anyway they like. For those over age 65, this means money to live on and enjoy now. There can be huge emotional benefit as well. My friend’s mother died of cancer a few years back. Because she was terminally ill, she was able to sell her insurance policy while living, getting cash to live on and pay medical bills with and still have enough left over for her son to benefit from the proceeds – he bought a new car…and she had the emotional benefit of seeing him with it before she died. Still others sell their policies because the policy is an underperforming asset, no longer needed or wanted and they have been thinking about surrendering the policy for the cash value (which usually will not yield anywhere near as much money). And for some seniors, the premium payments are unaffordable now that they are on a limited income.

Here’s how it works. Unless you are terminally ill, you have to be at least 65 years old and have a permanent (whole or universal) life insurance policy that is beyond the 2 year contestability period. However, if you have term insurance can also be used, as you may be able to convert the term to permanent insurance! Contact a broker who handles the settlement for you and finds the company willing to pay you the most money. The amount you get depends on your age, health, and current cash value of the policy. The policy, once sold, is pooled together and sold as a group with a lot of other people’s policies. When the person on the policy dies, the investment pool gets the death benefit.

It takes a small paradigm shift for most people to realize that the policy they own is a “sellable asset”, just like a house or a car. The New York Times reported Dec. 17th 2007 about Marvin Margolis, a senior citizen in good health, a Manhattan financial consultant who is thinking about selling his life insurance policy, which has a death benefit of 7 million for 2 million dollars that he can use now during his retirement. He said, “This is a wonderful way for me to use my body as a (financial) asset.”

For many people with underperforming universal life, whole life policies or term insurance, doing a life settlement may be just the ticket. Over a trillion dollars of life insurance lapses out every year due to nonpayment of premium. If simply “cashed in” these policies will simply yield their cash value, which is often substantially less than the death benefit. Perhaps the life settlement industry will help consumers keep a little more of their money. As financial planner Margolis said, “I deserve to be able to benefit in some way from my age.”

Eric Kossian was an Underwriting Specialist and later an Agent with State Farm before starting his own independent insurance agency in 2006.