Should you sell your life insurance policy? It all depends on your situation. You might (or might not) have the option depending on your policy, and it may (or may not) make good sense to sell your life insurance policy.
Even high-profile individuals are selling policies, although the transactions are completely private. In one case, however, the family’s financial troubles had become public, as well as the solutions they sought.
Ed McMahon, the former co-host to Johnny Carson on The Tonight Show, was a generous celebrity. Gifted with an optimistic personality, a hearty laugh, and decades of career success, McMahon lacked budgeting and financial skills. McMahon lost his health in 2007, then nearly lost his home to foreclosure in 2008 before passing away in 2009 at the age of 86.
According to CNBC.com, he had defaulted on a $4.8 million dollar mortgage to Countrywide. Apparently, not even a celebrity like himself was immune from the foreclosure crisis. In 2008, McMahon appeared on Larry King in a neck brace—the result of a fall that had kept him from working—and addressed the widely-reported news. “If you spend more money than you make, you know what happens.”
Interestingly enough, Donald Trump offered to assist the aging, ailing celebrity to stay in his home by purchasing it. Another real estate investor with similar intentions bought the loan, reported The Wall Street Journal, and the McMahons were allowed to stay.
The McMahons were also helped by a friend who told them about life settlements. As Pam McMahon (Ed’s widow) reports, they were previously unaware that they could sell a life insurance policy, thus using it as a liquid asset in a time of need. (A life settlement is created when a third party purchases a life insurance policy. We wrote more about life settlements a few weeks ago in “3 Ways a Life Settlement Funds Could Give You More Money in Retirement.”)
By some accounts, Ed McMahon carried multiple life insurance policies, and the premiums became an unmanageable burden to them, especially when injuries prevented him from working. According to a letter written by his widow Pam McMahon, Ed had more than one policy and they were able to sell one to ease their financial stress.
Why Seniors Are Selling Their Life Insurance Policies
As life expectancy has risen, some seniors find themselves cash-crunched later in life. Since life insurance contracts can be salable assets—like the deed to a home or a savings bond certificate—selling a policy should be considered in certain situations.
Interestingly enough, another well-known celebrity has chosen to endorse life settlements—and probably not because she needs a paycheck. 96-year-old actress Betty White says she has no plans to retire, recently making a surprise appearance on the Emmys to a standing ovation! White has done commercials for a company in the life settlement industry and has gone on record stating that she “would encourage any senior who is considering letting their life insurance policy lapse to consider a life settlement.” (Perhaps she is the friend who helped the McMahons with her advice?)
While many seniors who choose to sell their policies do so for financial reasons, there are also other reasons you may want to sell your life insurance policy. The beneficiaries may have passed away. You, as the policyholder, might simply wish to use the money differently, such as sending a grandchild to a private college. You may have multiple policies and no longer need them all. Or the policy may insure a “key man” in a business partnership who has retired. Just know this: having a desire to sell your life insurance policy doesn’t guarantee a buyer.
Can You Sell Your Life Insurance Policy?
The truth is, many seniors don’t qualify to sell their policies. In order to obtain an offer in the life settlement industry, the insured must typically be in their 80’s and in ill health. If you are healthy and in your 70’s or younger, it is doubtful that you will find a buyer for your policy. Buyers are also typically only interested in larger policies, such as those with face values of at least $100k. Premium payments must also be current, and the premiums must be manageable to the buyer.
Only certain types of life insurance policies are salable. It must be considered a permanent life insurance policy, such as whole life or universal. Variable policies are harder to sell because they are classified as securities. Straight term policies are not salable, but convertible term policies (convertible to universal or whole life insurance) are salable. In one case, we know of, a man with a $1 million dollar convertible term policy was able to sell part of his policy and use the cash from the life settlement to help him convert the rest of this policy to a permanent policy.
If a policy is not salable, there are often other solutions for seniors seeking cash or cash flow. Oftentimes, retirees have “lazy assets” that could be put to better use. There are better options than earning one percent or so in a bank certificate of deposit. Sometimes, a reverse mortgage may make sense. (Learn more about that option in this podcast with Kim Butler.) Or perhaps you can change the SEQUENCE of how you are spending your assets. This strategy can help reduce taxes and increase income! (We illustrate this strategy in a special report, “Permission to Spend.”)
For some people, annuitizing their policy may be a good choice—especially if you are in your 70’s or beyond and in good health. (Annuity payments are age-based, so the older you are, the greater the income an annuity will generate.) However, this is an irrevocable decision, so weigh it carefully.
Another strategy is to use the policy to create a charitable remainder trust. In a nutshell, a charitable remainder trust can generate a potential income stream for you while now creating a legacy gift for your favorite charity or charities.
Should You Sell Your Life Insurance Policy?
If you own a whole life policy, you may have quite a few options available to you. It’s one reason we recommend whole life—the policies are surprisingly flexible. For instance, policies held for a number of years may be eligible for a “natural vanish” or “reduced paid up” strategy. If you want to stop paying premiums, you might not need to sell your life insurance policy or surrender it. See this article on ProsperityPeaks.com for more details and several options: “Reduce or Stop Your Premium Payments—and KEEP Your Whole Life Policy!”
Even if you do qualify to sell your policy, it’s important to look at what option makes the best sense for your particular situation. Ultimately, it may make sense to KEEP the policy. This may be a discussion you wish to have with your family. You might even discover that it makes sense for a family member to buy the policy, rather than an investor. (After all, why not keep the death benefit in the family and create a win-win between family members?)
Deciding whether or not you should sell your life insurance policy—or advise a family member to do so—is also a matter for professional advice. For instance, there may be tax consequences to selling a policy. Or perhaps, a withdrawal or loan from the policy would make more sense in your situation. If you need help in weighing decisions, contact a financial advisor you can trust. The best financial advisors not only look out for their client’s interests, but are so committed to doing so that they take the time to think outside the box. Your financial advisor should be able to help you identify how to use life insurance to build and protect your wealth. They should help you understand what your options are for selling a policy or help you find other ways to increase the income from your current assets.
If You Decide to Sell Your Life Insurance Policy…
There are some things you should know:
Your policy may be worth less than you think. Sellers usually receive 21 percent or less of the face value of their policies, according to a 2010 report from the U.S. Government Accountability Office.
Laws such as waiting periods vary from state to state. If you’re considering a life settlement, research the specific laws governing the process in your home state. Many states have a mandatory waiting period of two to five years before a policy owner can complete the process. Some states have no waiting period. States with waiting periods may offer exceptions if applicants meet certain criteria, such as terminal illness, retirement, or divorce.
A life settlement broker may be able to help. If your policy is saleable, a broker who can “shop” it may be of assistance. However, be aware that brokers will charge a commission—an average of 9%, according to the GAO report.
Creditors may be able to claim cash. According to MoneyTalksNews.com, “If you have large debts, your creditors may have a claim to any cash you receive from your life insurance settlement.”
What About Investing in Life Settlements?
You may be wondering if there is an alternate way to benefit from life insurance in one’s portfolio for those who cannot easily qualify for life insurance policies. There are a couple of ways. First, accredited investors can invest in life settlements or life settlement funds. Find out more about this investment in this article: “Life Settlements: Pros, Cons and Facts About Life Settlement Investments.”
Secondly, a person can purchase and own life insurance for grandchildren, children, spouse, or business partner, provided that the person gives permission, if an adult. There are some surprising benefits to owning life insurance on younger generations, such as, typically, a more advantageous rate of return!
Both strategies are an excellent way to benefit from the stability of life insurance, which tends to remain steady when stocks and real estate become volatile.
Whether you are interested in selling your life insurance policy or investing in a life settlement (purchasing a third-party’s life insurance policy), you should seek financial counsel to understand what your options are and which available options might be in your best interest!