Whole life insurance can be tricky for seniors as only ~7% of policies ever pay a death benefit. Since most whole life policyholders expect some cash value in return, the idea of selling a whole-life policy may sound similar to “cashing in” but the two are quite different. A whole life settlement typically sells above the surrender value. The 2022 average is ~7.8X the surrender value (LISA). As whole-life policies can become unneeded or costly, some sellers are converting a liability into a cash windfall often equivalent to selling a second home.
Those with a whole life insurance policy may qualify for a whole life settlement. A life settlement is a safe option of selling (all or some of) one’s life insurance to a third-party investor (called provider). A whole life settlement is a safe alternative and should always be considered before lapsing, surrendering, or exchanging a life policy. Bridge is a licensed, life settlement broker who ensures sellers are treated fairly. Unlike direct buyers, brokers have a fiduciary duty to the policyholder. If you’re thinking of selling your whole life insurance policy, consider consulting a life settlement broker first.
As with all settlements, qualification and appraisal value are determined by three main criteria;
- Age: Must be 65 years or older unless diagnosed with a critical or chronic illness (no age restriction).
- Health: Any health status may qualify
- Policy: Favorable characteristics
Let’s consider how these criteria factor into a whole life insurance settlement in more detail.
Age Requirements for Whole Life Settlements
As mentioned, those 65 and older may qualify for a whole life settlement unless there are health impairments.
How Health Can Impact A Whole Life Settlement
Let’s review each case;
For terminal patients under 65 years old
You may still qualify for a whole life settlement even if you have a critical illness. This type of case would be reclassified as a whole life viatical settlement which may include additional tax benefits. Check your policy for an “Accelerated Death Benefit” clause which may allow you to receive proceeds direct from the carrier first, if not contact a life settlement company to review your case.
For seniors 65 and older
Good health does not disqualify a policyholder but it can impact the offer. Since whole life settlements hinge on life expectancy (a report showing how long an insured has left to live), those with poor health tend to receive higher offers than healthy insureds. To be fair, this is not always the case, as offers can depend on the policy characteristics (more on this below). Each whole policy is classified by health status which can usually be found in the title of the policy’s cover page. The cover page or “coversheet” is a summary of the policy. Let’s look at how these policy details can impact the offer amount.
Whole Policies for Life Settlements
What about the whole policies affecting the offer value? Here are some general characteristics buyers may find favorable;
Class & Premiums: The title on the whole coversheet may describe the policy as “preferred or standard”. Basically, good health is often rated as preferred and thus pays lower premiums and vice versa. Lower premiums are obviously more favorable since buyers will be taking over the premium payments from the insured until they pass. Most whole policies continue to age 100+ or until the insured passes away which can be more favorable that term policies.
Death Benefit Amount:Whole policies can have large death benefits making them favorable to investors. However, this is not a requirement. The minimum death benefit for most qualified life settlements is around $100,000. For example, a $12M whole policy MIGHT have more opportunity of selling than a $50,000 whole life policy. Consider this: It costs brokers and providers thousands of dollars to take on a whole life settlement case. The death benefit is what the buyer collects only after paying all upfront/closing costs, the settlement payout to the insured, and future premiums. It has to be worth the provider’s time. Conversely, if an insured with a $90k whole policy has less than a year to live, they may get a favorable offer between 20-80%.
If you’re not sure if your death benefit qualifies, contact a life settlement broker.
Cash Value / Surrender Value:Another factor which can be important is cash value. A life settlement broker’s job is to beat the cash value offered by the life carrier. Cash value isn’t a major factor for investors, since they typically roll it into the offer. Having too little cash value is not a disqualifier as is having too much. However, too much cash value can diminish the impact of a settlement offer voiding it useless.
Policy loans: Policy loans can also be rolled into the offer. Some providers would rather prefer to have the loan on the books after the sale. Policy loans do not disqualify a life settlement option.
Other Whole Life Policy Types
Whole Life Survivorship: Policies MAY NOT qualify.
Keyman Whole: Policies MAY qualify. Ask Bridge.
Group Whole Life: Policies MAY NOT qualify.
Whole Life Tax Considerations
After having a life settlement broker appraise your whole life policy, consider the tax implications regarding any gains against your premium basis. Depending on state, usage, and health, whole-life settlement may be tax-favored. Talk to your local tax professional for more info.
Whole Life Settlement Potential Risks
A whole life settlement proceeds may have claims from creditors, may affect Medicare Part B, further life insurance eligibility, and are subject to taxes and fees. Consider pursuing Accelerated Death Benefits (ADB) if a policy includes this option before a life settlement. Never take out a policy with the intent of selling to a stranger or warehouse a policy with the intent of selling after the contestability period (STOLI). If a company approaches you with this option make a claim to your state CFO or FINRA.
How To Prepare For A Whole Life Settlement Appraisal
Before talking with a life settlement broker, save time by having the following handy;
- A copy of the life policy (digital PDF preferred but not required)
- A copy of the coversheet (includes the title policy, carrier, insured information, and issue date)
- A copy of the annual OR most recent premium statement (cost basis document is helpful)
- An illustration to age 100 with $1000 remaining on the guaranteed side (not needed for term policies)
- A PDF copy of medical records from the last 3 years (get from a primary doctor or digital portal and include medication list)
What To Expect During An Whole Life Settlement Appraisal
Working with a life settlement broker is pretty basic. A quick review of the insured’s situation and policy will determine the qualification status. If an insured qualifies for a life settlement, a few signatures are needed to access med records (HIPPA), Life Release (illustrations/policy details), and Disclosure (what to expect). After signatures and the above information are collected, the application process begins and is presented to multiple buyers for real offers an insured can accept, reject or counter.
Final Thoughts
If you’re over 65 years old and have an active whole life policy, you should have it reviewed annually by a licensed life settlement broker. Unlike direct buyers, brokers (not just a “marketing organization”) have a legal fiduciary duty to the client’s best interest. Brokers often work for free upfront and are only paid a fee if a client accepts an offer to sell a policy. Moreover, brokers can help policymakers save time by streamlining the application process putting it in front of multiple buyers to obtain the highest whole life settlement offer.
