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How to Sell Your Life Insurance Policy for More Than the Cash Value

By Robert D. Cavanaugh, CLU Published 05/31/2007 | Finance

Most people do not know they can sell an insurance policy. There are companies that will pay you more than the cash value. Even term insurance, which has no cash value, is a candidate for purchase.

This transaction is called a life settlement. Life settlements have been on the scene since 1995; they are not new. While the purchase is facilitated by an insurance company, the buyers typically are pension and institutional funds which hold the policies in their investment portfolios.

Here are three common reasons why a person would sell their insurance policy

1. The policy has outlived its usefulness.

78% of all insurance is purchased for family protection. Families with children insure the breadwinner(s) until they have had the time to build up an estate or an adequate 401(k) plan to provide for the family, pay off a mortgage and educate the children. Most people have been there and done that.

However, later in life these needs may have disappeared. The house is paid for, the kids have been to college and your 401(k) plan has a balance ten times greater than your life insurance face value.

Rather than continue to pay premiums, or surrender it for its cash value, you can sell it for more than the cash value. Buy a boat, take an extended vacation or go down to the dealership and plunk down cash for that car you have always wanted.

2. The policy has a large loan.

There are three common ways a policy can acquire a large loan.

First, at some point you simply took a maximum loan against your policy. It could have been to satisfy an emergency, take advantage of an investment opportunityany number of things. But the loan was never repaid.

Second, you could have taken a modest loan years ago and never paid anything toward the principal. Every year, however, you received a bill for the interest due. If you are like many people, this goes in the round file and you never pay the interest. What happens is that the interest gets added to the loan. So what is originally simple interest turns into compound interest.

Over time, the loan and the unpaid interest can consume the entire cash value. That's when you get the letter from the insurance company telling you that to keep the policy in force, you need to come up with some astronomical amount of money.

But that's not the worst of it. When you call your agent to see what your other options might be, he or she informs you that if the policy lapses, there will be a gain (cash value less premiums paid) that the insurance company is required to report to the IRS. Worse yet is the fact that there is no money in the insurance policy to pay the tax (remember it lapsed for lack of premium payment and/or lack of any remaining values). So you are going to have to come up with the tax from someplace else. I don't think you would consider getting this information one of your better days.

3. You own Universal Life and interest rates have declined.

Getting this news is another bad day at the mail box. This time the letter from the insurance company says that in order to keep the policy in force, you have to come up with more than you could get for your first born.

How this occurs goes back to when you bought your policy. One of the major factors in determining the premium for a given face amount of Universal Life is the interest rate assumption made in the original proposal. Remember the double-digit interest rates? You could have bought your policy during this time frame. Most insurance agents would have suggested using a lower interest rate assumption to be conservative. However, interest rates have declined to even below these play-it-safe assumptions.

The sale of your insurance policy averts all three of these problems. In the first case, you don't have to pay any more premiums for coverage that is no longer needed. In the second, the problem you have with the loan disappears and is replaced by cash. And in the third, the probable lapse of the policy due to the fact that the premium to maintain the coverage is off the charts is offset by the cash received via a sale.

Robert D. Cavanaugh, CLU is a 36-year financial and estate planning veteran and author of the free newsletter, "The Estate Preservation Advisor". For cutting-edge, easy-to-understand financial planning resources and techniques to increase your income, reduce taxes and preserve your estate and to claim the free video, "How to Sell Your Life Insurance Policy for More than the Cash Value", go to http://theestatepreservationadvisor.com/rd/subscribe.htm