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Unlocking the Hidden Value of Life Insurance

Unlocking the Hidden Value of Life Insurance

December 14, 2021

The need for life insurance may no longer exist and/or the coverage may no longer be affordable.  Conversely, allowing a policy to lapse for no value or, in the case of a term policy, expire for no value, could be big mistakes. 

A life insurance policy is an asset that can be sold for fair market value just like other assets, such as a house, car, jewelry or artwork.  Unlocking the value of a life insurance policy through a life settlement transaction can make immediate and significant cash available to address other financial needs.

A life settlement is the sale of an existing life insurance policy for an amount greater than the cash surrender value and less than the death benefit.  Working with Cedar Point Financial Services LLC and its partners, you can have your life insurance appraised noting that, via negotiations with institutional buyers, a policyholder can, on average, receive 8 to 12 times more in the form of a life settlement than just the cash surrender value.  

Here are four examples where life settlements have been beneficial for policyowners where the insureds have been in their 60s or older:

Underperforming Trust-Owned Life Insurance

The family matriarch, now with health challenges, had a trust-owned policy that was purchased 30 years ago.  Based on the original policy illustration she had expected to only pay premiums for a short number of years assuming double-digit returns on the policy’s cash values.   Unfortunately, neither of these things occurred.  Her trusts and estate attorney ordered a formal policy appraisal which uncovered a significant fair market value:

Insured:  Age 84

Policy:  Universal life with a $2.8 million death benefit and $48,000 in cash value

The Life Settlement Outcome:  Received 34 bids and negotiated a payment of $1.1 million

Avoiding the Loss of Value in a Divorce

Ben and Lisa were going through a divorce and dividing up marital assets.  A policy on Ben’s life with a large cash value was one of the assets to be addressed.  Instead of just surrendering it or having one of the spouses take ownership of the policy and making ongoing premium payments, a family law attorney suggested exploring a life settlement to determine if the policy could fetch more than its cash surrender value.  If so, the couple could split the proceeds today as part of their divorce settlement:

Insured:  Age 69

Policy:  Whole life with a $15 million death benefit and $1.34 million in cash surrender value

The Life Settlement Outcome:  Received 22 bids and negotiated a payment of $4.5 million

The Sale of a Business that Owns a Key-Person Policy on the Business Owner

Sam was selling his business that owned a 20-year level premium convertible term policy on his life.  The policy was purchased 19 years ago as key-person coverage in order to help the business mitigate financial losses in the event of Sam’s death.  Due to the costly conversion premium, the company planned to just let the policy lapse.  As part of the sale, and on the advice of his CPA, Sam negotiated for the policy ownership to be transferred to him.  A policy review indicated there was significant life settlement value to the term policy:

Insured:  Age 68

Policy:  Convertible 20- year term life with a $2 million face amount and no cash value

The Life Settlement Outcome:  Received 18 bids and negotiated a payment of $630,000

Client Considering an IRC §1035 Policy Exchange

Elaine, a widower, no longer needed the survivorship policy purchased on her life and that of her deceased husband.  She planned to transact a tax-free 1035 exchange of the policy’s cash surrender value to an annuity for some additional income.  Elaine’s financial advisor told her that instead of carrying out a ‘direct exchange’ from one carrier to another, she should investigate the value of her policy on the life settlement market and, if that made more sense, do an ‘indirect exchange’ if the proceeds wound up being greater than her policy’s cash surrender value:

Insured:  Age 81

Policy:  Survivorship, one deceased with a $37,000 cash surrender value

The Life Settlement Outcome:  Received 7 bids and negotiated a payment of $150,000

Obtain an Appraisal

Policyowners who otherwise plan to surrender their life insurance or let their policies lapse, either because they simply don’t want it, don’t need it, or can’t afford to keep it, a life settlement can be an attractive financial alternative to consider in order to maximize value when walking away from a policy.  Cedar Point Financial Services LLC and its partners can have policies appraised and negotiate with prospective buyers to unlock their hidden value.