Sell your Insurance

Sell your Insurance

Check First Before You Cancel Those Old Policies
By Bruce D. Bernard, JD, CPA, ABV

Buying and selling life insurance policies became popular ten or so years ago when the AIDS epidemic broke out. The so-called "viatical" process is a way for terminally ill AIDS patients to enjoy a portion of their life insurance death benefit amount while they are still alive. The viatical concept caught on quickly for people with other terminal illnesses.

The viatical movement has taken a sharp turn in the last couple of years. Only a small percent of the policies now being purchased involve terminally ill people. Most of the transactions are now what are called "high net worth settlements". Although, the insured must still have a relatively short life expectancy – generally 12 years or less.

Most people think they have only two choices with life insurance policies – pay the premiums or cancel/cash-in the policy. Be advised of what could be a profitable third choice – selling the policy.

The cash sale price may far exceed the cash surrender value. The amount received in excess of the cash surrender value arguably qualifies for favorable capital gains treatment. The potential opportunity to sell a policy must be considered in any analysis of whether to keep a policy.

A quick example is helpful. In one case a $10 million policy was sold for $900,000. The policy was going to be canceled because it was no longer needed. The surrender value was only $150,000 and the premiums were staggering. A better-suited survivorship policy was purchased for estate planning purposes. All at a more reasonable cost and cash in the pocket.

In another example a $500,000 term policy was sold for $150,000. The insured was terminally ill. The policy was used to fund a business buy/sell agreement and was no longer needed.

Yes, even term policies can have a value. We generally consider term policies as having no value because there is no cash buildup. But, before you consider canceling a term policy, check into its salability.

The opportunity to sell a policy normally occurs when existing life insurance policies become unwanted, unnecessary, or unaffordable. For example, maybe the need for which the life insurance was designed no longer exists; like in the case where there is no longer a need to replace income upon the death of the insured. Or perhaps the business has been sold that generated the need for life insurance to fund a buy-sell agreement, or life insurance purchased to pay estate taxes is no longer needed because the estate has been effectively reduced through estate planning, etc.

An individual may want to sell a policy to enjoy the proceeds during retirement years. There may be the need to fund an unexpected expense. Many policies become unaffordable because of the high premiums.

Most viatical companies are only interested in policies with a face amount over $500,000. However, there is still a market for smaller policies.

Be cautious of who buys your policy. While you will get your cash up front, it will be disheartening if an undesirable person moves in next door. After all, remember someone continues to hold an insurance policy on your life and has an economic interest in how long you live.

And then, there are some potential charitable giving opportunities. Maybe it makes sense to give that policy you wanted to cancel to a charity that can sell it for a significant profit. Many of the charitable giving opportunities have tax planning opportunities.

Please give your Rea & Associates professional a call if you want to discuss your opportunities with your life insurance policies. We have the expertise to help you evaluate your choices.