Rethinking “Cashing In” A Life Insurance Policy

Most financial advisors have received a phone call or email from a client who is frustrated with the annual carrying cost to maintain a life insurance policy.

“I don’t even need this policy for my wife and kids anymore,” the client might say.  “Let’s just cash it in and be done with it.”

But what do the words “cash in” even mean with respect to a life insurance policy that is owned by a senior?

A life insurance policy is cashed in when the ownership rights to such policy are relinquished in exchange for whatever sum of money that can be obtained.  Unfortunately, too many retirees are tempted to receive the Cash Surrender Value indicated on their annual statements from the life insurance companies and ask their advisors to cancel, surrender or lapse their policies.  They wait patiently for a check from the carrier for whatever cash is owed to them and often feel relief in eliminating burdensome premium payments.

But that is just one way to cash in a policy and it often is the least rewarding financially.  The decision to lapse or surrender an unwanted life insurance policy back to the insurance company can cost senior policy owners tens of thousands of dollars; and even significantly more with large-face life insurance policies, dramatically reducing the amount of funds a retiree has for retirement.

If a life insurance policy is no longer needed or affordable — or perhaps is no longer serving its original purpose — seniors need to be aware of multiple options prior to cancelling, surrendering or lapsing the policy, such as the following:

• Withdraw funds from the cash value account in the policy, just like a savings account.
• Access a portion of the death benefit payment now through an Accelerated Death Benefit rider (sometimes referred to as a “living benefit”).
• Take out a personal loan against the policy’s cash value.
• Sell the life insurance policy for its fair market value.

The last alternative is not as well-known and understood by seniors, however, it may represent the greatest return.

Indeed, many advisors themselves are unaware that there is a viable, highly regulated market to sell a life insurance policy to a licensed third party entity through a transaction called a life settlement.

A life settlement enables qualified policy holders to sell their coverage to a “life settlement provider” in exchange for a lump sum cash payment.  These funds can be used to help pay for retirement expenses, offset expensive health care bills or provide gifts to family members or charities.  The life settlement industry has paid out billions of dollars to consumers over the past few decades.

Furthermore, the data point that all advisors should share with their next senior client who wishes to cash in his life insurance policy is highlighted in a 2022 study by the Life Insurance Settlement Association.  It found that consumers who sold their life insurance policies through life settlements received an average of 7.8 times more money than they would have obtained by lapsing or surrendering the policies back to the insurance companies.

After a retiree confirms his interest in pursuing a life settlement, he should utilize the services of a licensed life settlement broker.  The broker determines the life insurance policy’s eligibility and by law, represents the best interests of the policy owner throughout the sales process.  The life settlement broker will maximize competition by negotiating with multiple qualified life settlement providers who compete to extend the best offer to purchase the policy.  Then and only then, will a senior and his trusted financial representative know the true marker value of a life insurance policy.

For more information about life settlements or to receive a free life insurance policy appraisal, then please call 1-877-227-4484 or go to www.welcomefunds.com.