Can I Sell My Client's Life Insurance?
As a life insurance agent, your job is to match your clients with the right life insurance policy. But what happens when a client no longer needs the coverage or can’t afford the premiums anymore?
Canceling the policy may sound like the best idea to them, but they may get more value if they sell it with a life settlement. As their agent, you’re in the position to help guide your client toward making the best choice for their situation and needs.
Life settlements explained
A life settlement is the sale of an existing insurance policy to a third-party company or investor in return for cash. This third party pays you a sum and takes over your monthly premiums, then ultimately receives the policy benefit when you pass away.
The amount you’ll receive can be anywhere between 10% and 50% of the policy’s face value and averages roughly 22%.
More importantly, the cash you’ll receive from a life settlement is always more than you’d get if you were to surrender the policy and get the available cash value. In fact, there are instances where the policyholder receives 26 times more cash through a life settlement than what his insurer would’ve paid him if he had surrendered the policy instead.
The cash value of a life settlement is based on a few different factors, including your:
- Type of insurance
- Policy size
Types of life settlements
Depending on your client’s needs, you can recommend one of three options: a traditional life settlement, a viatical settlement, or a retained death benefit life settlement. Here’s a quick summary of each.
Traditional life settlement
This is the basic form of life settlement that we discussed in the previous section. If your client is over 70 years old, in reasonably good health and no longer needs the policy, a traditional life settlement is a good choice.
This life settlement option is designed specifically for clients who are terminally ill and don’t have an accelerated death benefit rider on their policy. With a viatical settlement, your client can get the cash they need to pay current medical bills and future treatment.
Retained death benefit life settlement
If your client no longer needs or can’t afford their full policy but still needs some coverage, consider recommending this option.
As the name suggests, your client would keep a portion of their policy benefit after the third-party company or investors takes over. Depending on the situation, they may do this instead of receiving cash or in addition to a payment. If they do receive a payment, it will be much less than if they were to go with a traditional life or viatical settlement.
Consult with your client to determine the right course of action for them and their loved ones.
Types of life insurance you can sell
Life settlements are common with permanent life insurance policies such as universal life because they already have built-up cash value. Whole life policies are also sold, however much more rarely — over 90% of life settlements are for universal life insurance policies. But it’s also possible to sell a term life insurance policy in a life settlement if it’s convertible to permanent insurance.
That’s especially helpful because term policyholders typically receive nothing in return when they cancel their policies.
Most life insurance companies offer a conversion rider on their term policies, but some charge extra for the benefit. If your client’s policy has a conversion rider but no accelerated death benefit, consider recommending a life settlement instead of canceling.
If they qualify, they only stand to gain from getting rid of the policy.
How to determine if your client is eligible
While technically anyone can try to sell their life insurance policy, your client will only get a life settlement if the investment is worth it to the buyer. Here’s what to consider when talking with your client about a life settlement:
Age and health: The older you are, the better the chances of finding a buyer. For example, if your client is 30 years old and in relatively good health, the potential buyer would likely need to make payments on the policy for decades to come before getting any benefit from it. As a result, your client will have a hard time selling their policy.
If, however, they’re 65 or older and have a major medical condition, they’ll have an easier chance finding a buyer.
Policy type: Whole, universal, and term life insurance with a conversion rider are all eligible for life settlements. But if your client has a term policy, they’ll need to convert it to a universal life insurance beforehand.
Policy size: Investors and life settlement companies are looking to get a good return on their investment, so it’s recommended to have a policy with at least a $100,000 face value. If you’re eligible for a viatical settlement, you may qualify with a policy with a face value of $50,000 or higher.
How to determine if a life settlement is right for your client
Even if your client is eligible for a life settlement, it may not be in their best interest to sell their life insurance policy. Here are a few things to consider as you consult with your client.
Can they afford the policy?
Many people let a life insurance policy lapse because they can no longer afford the premiums. This can especially happen with universal life policies because premiums aren’t necessarily set for life. For example, a handful of insurers hiked their universal life premiums as high as 72.4% in 2015.
If your client can no longer afford their policy because of premium increases or other budget-related restrictions, a life settlement may be a no-brainer. If they can afford the policy, however, they may have more options.
Do they need the coverage?
As your clients get older and accumulate other assets, their need for life insurance coverage typically dwindles. While there are some exceptions to that rule, especially with large estates, your client may no longer want to pay for a benefit they don’t need anymore.
One solution to this problem, if the client wants to keep some coverage and the insurer allows it, is to reduce the face value of their policy.
But reducing the client’s policy benefit could have a negative impact on their cash value, and they may get more value out of selling the policy instead.
Do they need the money?
If your client is already considering surrendering their policy to get access to the cash value, there’s a good reason for it. For example, there may be some unexpected expenses that have come up, or they may be looking to supplement their retirement income.
Speak with your client about their cash needs, and help them understand that selling the policy would likely net them more than if they were to cancel the policy and take the surrender cash value. You can find out how much your client’s policy is worth with an online tool.
How life settlements are taxed
If your client is considering doing a life settlement, help them understand what kind of tax implications they’ll be dealing with.
Let’s say your client has paid $40,000 in premiums over the years and can sell their policy for $60,000. The $40,000 in paid premiums less any dividends received or withdrawals taken out is considered their basis and that amount is not taxable. In this example, we’ll say there were no dividends or withdrawals.
The remaining $20,000, however, is generally considered a gain and is subject to tax. With an effective tax rate of 25%, that’s a tax bill of $5,000.
The one exception to this rule is with viatical settlements. If your client has a life expectancy of two years or less, receiving a gain on a life settlement typically doesn’t trigger a tax liability.
As you walk through the tax implications with your client, recommend that they consult a tax professional to make sure they have all the facts. Recently things have changed, the 2017 Tax Cuts and Jobs Act included provisions that generally reduce taxes due on a life settlement transaction. A CPA can give your clients an idea of what their effective tax rate would be and if there are any ways to limit how much they’d owe.
Consider all of the alternatives
A life settlement can be a great way to help your clients get out of their policies with more cash in hand. But if they don’t want to get rid of the policy, there are other ways to cash in, so to speak.
For example, cash value life insurance policies allow you to take out a policy loan at a reasonable interest rate. While repaying the loan is recommended, your client technically doesn’t have to do so. The loan amount will be deducted from the policy benefit when they pass away.
If your client has an accelerated death benefit or long-term care benefit included in their policy and they’re eligible to take advantage of those riders, it might make more sense for them to go that route instead.
The important thing is that you take the time to provide your client with the best solution possible. While that might not necessarily put extra money in your pocket, establishing trust and putting their best interests first, it could open up opportunities for referrals and word-of-mouth advertising that can be difficult to get otherwise.