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John chose a Retain A Portion Settlement once his life insurance premiums became unaffordable.
- Retain A Portion Settlement:
- Age 75
- Universal Life Policy
- 1M Face Value
- John’s monthly premium $500 (plus he dumped in some cash from small policies when he bought it)
- John’s cash value was down to $25,000
John was able to get a $25,000 cash payment and still retain a portion ($150,000) of life insurance for Mary, without paying any more premiums versus just surrendering the policy for his cash value.
If John wanted to keep the cash growing he would have had to increase his monthly premiums or decrease his face amount. John qualified for a Retain a Portion Settlement and received a cash payment of $25,000 and retained $150,000 of life insurance for his wife, Mary and owed no more premiums.
Understanding Retain A Portion Settlement
The Retain A Portion life settlement (RAP) is a relatively new option that is designed to help you if you still need some life insurance, but cannot afford to pay the premiums on the policy you already have. RAP works best with a Universal Life Insurance policy or a Convertible Term Insurance policy.
John’s Example
John is aged 75 and has a Universal Life Insurance policy. When John initially purchased his policy 25 years ago, he did so primarily to get the life insurance protection for his family. He chose the Universal Life Insurance policy (UL) over Whole Life because the premiums were lower at the time. He chose the UL over a term insurance policy because the current interest rate at the time the time was 7.5% and the illustrations showed that John should have a significant cash value ($200,000) at age 75.
John figured that at age 75, 10 years after he expected to retire, that it would be wise to maybe begin to draw some of the cash out of his UL to supplement his retirement income. John fathomed that he would most likely not need the insurance at that time or certainly not as much insurance as he did when he bought the policy.
The interest rate on John’s UL declined to the guaranteed rate of 3% over the years and the cash value did not grow nearly as quickly or become as large as the illustration led John to believe it would. The problem with this scenario is that because the cash value element of John’s UL did not grow to the level John anticipated, the internal provisions of his life insurance policy required that John pay for more insurance within the policy to maintain his death benefit.
He had chosen a level death benefit which means that the total value that would go to his wife Mary was a combination of John’s accumulated cash value and a decreasing amount of insurance that was paid for with some of his premiums. Because John’s cash value did not grow as anticipated, the cost of the insurance hit a point where all of his premiums were going towards the cost of insurance and his cash value stopped growing. Eventually the cash value of his UL began to actually decrease because the cost of insurance on a monthly basis was more than the premium he had been paying for more than 20 years.
If John wanted to keep the cash growing he would have to increase his monthly premiums or keep the same premium and decrease his face amount which Mary would collect when John died. John didn’t really need all of the life insurance that he was paying for and the premiums he was already outlaying on a monthly basis could best be used for medical expenses which had recently come up because of John’s heart condition.
John elected to sell his life insurance policy, but instead of selling his life insurance policy for just cash, he elected to apply the hidden value towards retaining a portion of his life insurance and was no longer required to pay premiums. By doing this, John was able to keep some life insurance for Mary, pay no more premiums and use the money he was currently spending on his life insurance for his medical care.
All examples are for illustrative purposes, rounded to illustrate the concept and each actual case is unique.