Nest Eggs       More than 100 years ago, in its landmark, Grigsby v. Russell decision, the U.S. Supreme Court ruled that life insurance is personal property. It can be bought and sold like any other property owned.

This means your life insurance policy has value to you or your family right now, not just when you pass away. Unfortunately, the vast majority of people are unaware of this simple fact.

The problem arises when the policy owner concludes they just can’t afford those premiums anymore, perhaps because they’re now in their retirement years and living on a fixed income. Or maybe they decide they just don’t need the death benefit anymore now that their children are grown, have steady jobs and built families of their own.

So, in the absence of knowledge about any other alternatives, most policy owners in this situation just lapse or surrender the policy back to the insurance company, accepting whatever small amount of cash surrender value is available.

Research available to the Life Insurance Settlement Association indicates that more than 710,000 policies are lapsed or surrendered each year — with a combined face value of more than $57 billion — by American seniors over the age of 70.

It’s important to contact your trusted insurance advisor [since it is their fiduciary responsibility] who can inform you of your options and instill awareness of alternatives to lapsing or surrendering a policy. 

But aside from the fiduciary issue, there is a common-sense test: if a person could lapse a policy for its nominal cash surrender value of $20,000 or able to sell that same policy to an investor for $150,000, they should be entitled to this information.

So, if a person has decided they no longer need or can afford a life insurance policy, what are the alternatives to lapsing the policy and surrendering it back to the insurance company?

Here are the primary options that you should know:

  • Maintain the policy through loans, using the policy or its cash surrender value as collateral;
  • Seek an accelerated death benefit, if possible;
  • Convert the policy to a long-term care health insurance policy, if possible;
  • Assign the policy to someone else as a gift or to a non-profit organization as a charitable contribution;
  • If it is a “term” policy, attempt to convert it to permanent insurance;
  • Reduce the death benefit (a lower “face value”) and the premiums; and
  • Sell the policy to a third-party investor through a life settlement.

As with any financial planning decision, there is no “one size fits all” answer to which of these options is best. The one that makes the most sense for you will depend on the your unique needs and desires as the policy owner — and that is where your trusted advisor, can play an invaluable role to guide you to the wisest decision.

90 percent of seniors who lapse policies without knowing about a life settlement indicated they would have considered that option had they known about it; and that 79 percent feel their advisors should inform them about a life settlement option.

Consider this story: A car dealership owner originally purchased a $488,000 life insurance policy to fund a buy/sell agreement with his business partner. After the business dissolved, his family continued to pay the premiums, but eventually decided the coverage was no longer needed.

He was planning to surrender the policy back to the insurance company for $6,800, then learned he had another option: to sell his policy to a life settlement company for $80,000. That’s more than 10 times what he would have received from the insurance company. The proceeds were divided among his three children, which they used to supplement their income.

If your main motive is to obtain cash in your hands — for retirement needs, health care expenses or simply to invest into other assets — then a life settlement is likely the best alternative. As a life insurance policy owner, when you enter into a life settlement, you can realize an average of seven times the amount of the policy’s cash surrender value, based on an analysis of a 2010 survey by the U.S. Government Accountability Office.

Perhaps that’s why 90 percent of seniors who have lapsed a policy would have considered selling it if they had known a life settlement was an option, according to a survey prepared for the Insurance Studies Institute.

Regardless of what you choose to do, just make sure that you are informed of all options before you lapse that life insurance policy.