Should My Spouse and I Sell Our Life Insurance Policy Now That We Are Retired

You were smart enough to purchase life insurance – maybe multiple policies of different types – many years ago to protect one another and your loved ones in the event either of you passed. A great decision that provided both protection and peace of mind.

But now that you’ve retired the next smart step is determining if you should keep or sell those policies.

Introduction

Generally when we buy something we expect to use it for as long as it lasts or until it stops providing us with utility. You know, the old stitch-bare Hawaiian shirt you love but your spouse keeps trying to surreptitiously dispose of in a plausibly deniable manner.

Or any of the countless items in your junk drawer or out in the garage that you gotta keep because you may need them one day.

Point is we purchase “stuff” all the time and use it, then continue to hold onto it even after the doohickey has served its purpose.

This same mannerism tends to hold true with life insurance – you buy and continue to pay whether or not that trusty life policy still serves its purpose for you, such as after you’ve retired and no longer need to replace your income in the event you or your spouse were to pass.

This phenomenon begs the question of whether it makes sense to keep a life policy once you retire, and if not, what your options might be.

Many people don’t even realize it’s possible to sell a life insurance policy. They believe life insurance is like the “Hotel California,” once in, you can never leave!

Or maybe you can just stop paying the monthly premium and hope the insurance police don’t come knocking on your door one day demanding a pile of money, or else!

According to the National Association of Insurance Commissioners (NAIC), selling a policy is a possibility. It happens all the time. The real question you should be asking is whether it makes best sense for you to do so.

Take time to assess

Before you start advertising in the local newspaper that you have a slightly dated but well-maintained life policy for sale, the first thing you need to do is determine what it is you actually have.

Be honest, unless you worked in the insurance industry, there’s a good chance you don’t know what it is you actually have.

So an assessment needs to occur that starts with determining which type(s) of insurance you have.

From a practical standpoint, there are two primary types of insurance – term and permanent/cash-value.

Term – a simple type of insurance product that is low cost (comparably), provides a death benefit and is used for the simple purpose of replacing your income or that of a spouse if either should die. These are usually purchased over a set term, such as 10, 20 or 30 years.

Cash value – these policies are a type of insurance product that actually accumulate a cash value over time (tied to things such as interest rates) and are intended to be permanent, so you pay for them permanently in order to maintain them.

There are a number of types of cash-value life insurance policies, including whole, universal and variable, each of which offer different types of benefits (including death), some of which are fixed while others are variable.

There are variations which can cover specific needs, such as final expenses, paying for the mortgage when you die, and more.

What’s key here is not becoming an expert on the various types of life insurance available in the market, but rather which policy(s) you own. Chances are you may  own multiple, including term and maybe even differing permanent life policies.

Reasons to keep your policy(s)

Now that you know what you have, it’s time to weigh the benefits of selling a policy or even surrendering it, versus keeping it.

Among key reasons for keeping a policy (cash-value or term) include:

You have debt The death benefit can cover those debts in part or whole upon your passing, which relieves the burden of your estate paying your creditors, which can potentially leave more value for your loved ones. The debt can include mortgages, autos or other vehicles, personal or business loans, credit cards, and more.

Working in retirement If you are currently working in retirement or believe you will do so in the future, that income you earn is probably important to you and your spouse. Were it to disappear, it might cause financial issues for the survivor. That life policy could be used to replace the income if either of you were to come to an untimely death, thus avoiding a potential financial hardship for the survivor.

Disabled children If you have a disabled child with long-term needs, the associated expenses generally last through their lifetime and can add up substantially. As such, maintaining a policy makes sense to ensure they are taken care of to the fullest extent possible once you pass.

Charitable giving If you plan to leave something to a cause you care about, you might want to maintain a policy. In fact, you might want to consider paying the premium each year versus gifting the charity annually. By making that entity the beneficiary, they will receive a lump sum (example – $500,000) upon your death. Many charities now suggest this as a strategy for their benefactors. Talk with your retirement planner or a tax attorney before doing so to ensure this strategy works for your personal situation.

Estate planning tool – Once you pass it can take time for beneficiaries of your estate to begin to receive the assets you are passing on, be they cash, stocks, property, et cetera. A life policy can be used as a tool that pays out immediately upon your passing. The proceeds can pass on to family members to use to cover funeral and other final expenses, existing debts you may still owe and even estate taxes. A life policy can potentially alleviate the need to sell assets (which can be tough due to timing, nature of illiquid assets such as real estate, et cetera) to cover such expenses.

There are also potential trust strategies utilizing a life policy that could be used as part of overall estate planning. You’ll want to consult a retirement planner and/or attorney in this regard.

Selling your policy(s)

If it doesn’t make sense to maintain your policies for any of the reasons listed above, then you have a number of options.

First, if you can’t afford the premiums you can contact your insurer to inquire about options, such as reducing the amount of the death benefit, which in turn will reduce what you pay each month.

Otherwise, you can surrender the policy. Simply stop paying the premium and let the policy lapse (there’s no penalty). Some policies even have a surrender clause incorporated that specifies a surrender value. If so you will receive the surrender value once you relinquish the policy.

Finally, you do have the potential option of selling.

The good news is there does exist a secondary market for life insurance policies. There are companies who specialize in this regard that are known as life settlement companies.

In a nutshell, they represent clients who are generally institutional investors or financial institutions who seek to buy life policies that have remaining value in the form of the associated death benefits.

They buy life policies from individuals who no longer need them, given they are now older and don’t need life insurance to replace income. Or from individuals who seek to cash in their policy out of financial need.

Note – quite similar to life settlement companies are viatical settlement companies who purchase life policies from individuals who have been diagnosed with a terminal condition or who suffer from serious chronic illness.

This enables a person with limited life expectancy to receive cash on a policy they own sooner in order to address financial strains before they actually pass. Just as with a life settlement policy purchase, the settlement company becomes the owner of the policy for the benefit of their customer and receives the death benefit upon the death of the original policy owner. A viatical settlement can be treated as a tax-free event.

How it works

According to the Life Insurance Settlement Association (LISA), if you decide to sell a policy you can either work directly with a life settlement company or choose to utilize a life settlement broker. They will work on your behalf attempting to sell the policy to any number of life settlement companies.

In terms of working with a broker, they represent you and will shop the policy to a number of different potential buyers (life settlement companies) attempting to get you the most money for your life policy. They handle the details of the transaction, guiding you in what’s needed and negotiating on your behalf so that you don’t have to do so yourself. You will want them to obtain multiple offers from which to choose.

But they do charge a commission to do so, which can range up to 30-percent of what the life settlement company agrees to pay you for the purchase of the policy.

Whether direct or through a broker, when a policy is purchased by a settlement company for the benefit of their client, they pay you the agreed upon amount, at which point you no longer own the policy. Importantly, your beneficiaries on the life insurance policy will no longer receive the death benefit upon your passing.

The life settlement company will assume payments and continuing paying until your death. At that point, the death benefit is paid by the issuing insurer to the settlement company for the benefit of their client.

If you do decide to sell a policy and it has cash-value that has accrued, you keep that upon the close of the transaction.

Process

Generally speaking, the sale of a life settlement policy involves several steps:

Application – You will fill out an application providing information about yourself, your health and the life insurance policy you wish to sell. Within the application you will provide authorization for the life settlement company to examine the policy, speak with the insurance company that issued the policy and obtain medical records to assess your general health condition and/or issues as part of their due diligence process.

Information gathered – Underwriters for the life settlement company will conduct their review of all of the aforementioned information, speak with your physicians and also work with actuaries to gain a full understanding of the risk and opportunity on the part of investors and/or institutions that might purchase.

Valuation – With all information gathered and assessed, which includes the specifics of the actual life policy (length, death benefit, restrictions, et cetera) a determination is made whether there is real market value regarding the policy. If so, the company will assign a market value.

Offer – The life settlement company will provide their offer along with their terms, such as any restrictions, the timing of when they will pay and other relevant information.

What you can expect to receive

Each individual transaction is unique, based on the companies involves, as well as key factors, such as the length of policy, amount of death benefit, your health, and more.

According to LISA, the average life settlement is roughly 20-percent of the policy’s face value. That means if your policy has a $200,000 benefit, you might receive $40,000 from selling it. Again, it’s suggested that whether on your own or through a broker, you seek multiple offers to ensure you get the best price.

Key considerations

Keep in mind there might be additional fees and the fact you will generally owe tax on the settlement offer paid. You definitely need to speak with a tax lawyer or retirement planner when it comes to the tax situation.

Any proceeds received from a sale aren’t shielded from creditors and they will be considered income. This can increase your total income for the year, which can potentially bump you into a higher tax bracket – meaning you might owe more tax. In turn that increase could potentially disqualify you from eligibility in terms of Medicaid and other types of financial assistance.

Before you do agree with an offer you should check with the issuing insurer to determine if the policy might have a cash surrender value. If so, you want to weigh that against potential sale proceeds offered by the life settlement company. Generally the cash surrender value will be worth less than a selling offer.

If you are doing a sale direct with a life settlement company you will want to check with your state insurance regulator regarding process, requirements and potential scams that have occurred to protect you and your family.

The next step is the close, at which point the sale is finalized. All paperwork is completed accordingly, your insurer is notified and ownership of the policy is transferred to the settlement company.

Assuming the transaction proceeds without problems or delay, you can expect the entire process to be completed in 60 to 120 days on average.

Conclusion

As you’ve probably surmised, there are many instances where maintaining a life insurance policy(s) you currently own might make sense. Generally speaking the death benefit will have much more value than what you will receive from either surrendering or selling the policy.

To be safe it makes sense to speak with a retirement planner and/or tax attorney before doing anything with the policy, given it might be useful to maintain and there can be tax implications involved.

Oak Harvest can certainly assist you with this. We can review your overall situation to help you determine whether maintaining a policy(s) makes sense or if instead you might be better served selling.

We would do so in the context of your overall retirement plan. If you don’t already have one, we can work with you to create one that meets all your needs. We can assist by building a holistic, comprehensive retirement plan addressing relevant issues, utilizing strategies that cover taxes, income, spending, healthcare, LTC, legacy, and more, customized to your family’s specific scenario.

A plan created with the goal of ensuring you have the best opportunity of living out the retirement you and your family envision.

If you are ready to take the next step and talk to a team of retirement planners who can advise on all your retirement needs, and who will put your interests first, Schedule a call today!