Term insurance is an inexpensive way to protect against disaster. Often a relatively young person purchases term insurance on the theory that, if he or she suffers a premature death, the insurance can be used to pay off the house and college tuition. But expenses such as these are not permanent. Once the house is paid off and the children grown, the need for insurance may no longer be present. Because term automatically lapses after a certain amount of time, it is relatively inexpensive and provides temporary protection.
Many people incorrectly assume that term insurance must lapse after the term, and thus has no value beyond the peace of mind it can provide. However, due to the life settlement market, term policies may have value beyond their term for a number of reasons. It is essential to determine with your financial adviser and/or insurance agent if your policy has hidden value.
Conversion of Term to Permanent Insurance
The life settlement market allows the sale of unwanted or unneeded life insurance policies for more than surrender value. Many believe that only permanent policies can be sold in this market, but that is not correct. Often term policies have a conversation feature that allows the policy holder to convert the term insurance to permanent insurance, thus making it eligible for sale.
Many avoid conversion of term because premium costs go up. But if the policy will be sold upon the conversion, the insured need not pay further premiums and there is no downside to conversion. Often one may convert the policy with no further underwriting as well. This is ideal for an insured whose health has faltered and can no longer obtain new insurance. The sale of the policy can help with medical bills and living with illness or in retirement. As an added win, the insurance agent who performs the conversion usually will earn a commission from the insurance company.
The conversion and subsequent sale of a term insurance policy allows:
1. The insured to sell an asset that he/she no longer needs and to use the funds to pay expenses.
2. The insurance agent to earn a commission for the conversion.
3. Institutional investors to purchase a policy with an attractive risk profile that can be packaged into a diversified portfolio that is uncorrelated to the broader stock market.
If you have a term life insurance policy, there may be better solutions than allowing it to lapse after the term. To learn more about life settlements and other options available to consumers who no longer need or can afford their life insurance policies, visit the “Life Policy Owners” section of the LISA website.
About the Author:
Dan Young, CLU, ChFC, CASL, is the President of Magna Life Settlements, Inc., a well-established life settlement provider focused on maintaining transparency, risk management and rigorous process control in the purchase of life settlements. Magna is owned by Vida Capital, a vertically integrated asset management company providing longevity contingent investment solutions to institutional and individual investors. Dan is the Vice President, Asset Management and General Counsel of Vida.
In addition to his role at Vida, Mr. Young is an adjunct professor of regulatory law at the University of Texas Law School, Board Member and Chair of the Legal Committee of the Institutional Longevity Markets Association (ILMA), Board Member of the Life Insurance Settlements Association (LISA), and a frequent speaker at life settlement industry conferences. Prior to joining Vida Capital, Mr. Young was the President and CEO of New York Life Insurance Company’s Broker-dealer and Registered Investment Advisor. Mr. Young graduated from Stanford University with Honors and Distinction and from the University of Chicago Law School with Honors.