Receiving a Term Life Settlement
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Bill And Ellen chose a Term Life Settlement instead of lapsing their Term Life Insurance
Bill Chose a Term Life Settlement:
- Age 70
- Convertible Term Policy
- 1M Face Value
- Received $60,000 Cash
Bill purchased a 20 year term life insurance policy at age 50 with a guaranteed annual premium of $3000. When the term was up, he needed to convert to a universal life policy with premiums of $20,000 per year. Bill instead chose to sell his life insurance utilizing a Term Life Settlement and received a $60,000 cash lump sum.
Bill and Ellen’s Example
Bill is a male aged 70 who purchased a 20 year term policy when he was aged 50. His annual premium was guaranteed not to go above the $3000 per year he has paid for 20 years, but he cannot renew his term insurance and the cost of converting his insurance to a Universal Life insurance plan at age 70 is $20,000 per year.
Bill does not really need the insurance any longer because his retirement savings have grown to the point that when he dies there should be enough cash to take care of his wife, Ellen. Bill will likely just lapse his life insurance policy because he can’t afford the new premium. Because Bill has had some health issues, he was able to sell his $1,000,000 term life insurance policy for a $60,000 lump sum of cash. Essentially, Bill can unexpectedly recover all of the premiums that he has outlaid for the coverage over the past 20 years. If Bill had major health issues such as cancer he would have been able to get more cash than he even paid into the policy. If Bill was in better health than he currently is, he would have received less cash, but it is still better than nothing, and on a term life insurance policy he was just going to cancel.
A term life settlement worked in this example using Bill and Ellen and it has become a viable alternative for many Americans faced with the same sticker shock when reviewing the new premiums for the life insurance that they really no longer need.
Understanding Term Life Settlements
A Term Life Insurance Settlement is a great alternative to simply lapsing your life insurance once you have reached the end of your term. Term Life Insurance is the cheapest way to get the coverage you need but it does not have a cash value element to the policy like you would have with Whole Life or Universal Life insurance.
With Term insurance you are paying for pure life insurance protection and nothing else. The ‘Term’ of your term life insurance can vary. There are policies that are term to a certain age like term to age 65 or term to age 75 and there are fixed year term policies like 20 year level term or 10 year level term. The ‘Term’ is basically an average of the cost of your life insurance over that specific time period or term.
Annual renewable term insurance would have you paying an increasing premium every year, which makes sense because as you get older, the expectancy of your life span goes down each year making it more expensive to insure your life. Rather than paying an increasing premium each year you may have opted to pay a level (the same) premium each year over a specific term.
The problem that you may be faced with is that at the end of your term, whether that be at a certain age like 75 or a certain time period like 20 years; your life insurance premiums can sky rocket, thus making your term insurance no longer affordable. It is not uncommon for a conversion premium to be as much as ten times larger.
Sometimes at the end of the term you cannot renew the term life insurance at any premium level, but are required to convert your term life insurance to a permanent plan such as Whole Life or Universal Life. The premiums on a permanent insurance plan, because you are both more expensive to insure and because the plan has a cash value element, can be completely cost prohibitive.
All examples are for illustrative purposes, rounded to illustrate the concept and each actual case is unique.