Most people don’t know there is such a thing as a life insurance settlement. Did you know you can sell a life insurance policy? If you are age 65 or older, there are companies that will pay you more than the cash value for your policy. Even term insurance, which has no cash value, is a candidate for purchase.

This sale of a life insurance policy is called a life insurance settlement. This option has been available since 1995. The buyers are usually pension and institutional funds that make the purchase through an insurance settlement company.

There are several reasons to consider a life insurance settlement.

1. The policy is no longer needed.

If you are like most people (78%), you, as the primary wage earner, bought a life insurance policy to provide for your family’s needs if you met an untimely death.

Later in life this might not be necessary. A life insurance settlement can convert the policy into more cash than just cashing it in with the company that issued the policy.

2. You have borrowed heavily against the policy.

At some point you borrowed the maximum amount against your life insurance policy. For whatever reason, you haven’t repaid the loan.

Every year you receive 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 each year the interest is added to the loan.

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. If the policy lapses there will likely be a gain that the insurance company is required to report to the IRS. Worse yet is the fact that there is no money in the policy to pay the tax.

A life insurance settlement can solve all these problems. When you sell your policy, the loan becomes the institutional purchaser’s problem. In the real world, they will pay off the loan and get rid of the potential lapse problem.

The problem is that you can’t always count on this solution to the problem. Sometimes there isn’t a settlement company willing to pay for a policy with such a large loan against it. Sometimes the amount offered to buy the policy isnt enough to meet your needs.

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

One of the major factors in determining the premium for a given face amount of Universal Life is the interest rate assumption made at the time you bought your policy. Due to the decline in interest rates in recent years, your original premium may not be sufficient to continue your policy.

If this happens, you get a call one day to tell you that if you want to keep the policy you have to pay the difference in the premium amount. This will be some outrageous amount of money.

You can handle this problem with a life insurance settlement.

Consider, if you will, a couple of actual examples:

A woman purchased a $1 million universal life policy many years ago. She is now 82 years old. The premium she has been paying for decades has not been enough to pay the required premium for some time. The difference has been deducted from the cash value of the policy, bringing it down to $17,800. Unless the woman can pay much higher premiums, the policy will lapse in two years.

Her estate plan includes keeping some kind of insurance policy in effect, but at a much lower amount. She decides to solve this problem by accepting a life insurance settlement of $192,000. She then turns around and uses it to buy a paid-up life insurance policy and covers it with a single-premium payment.

A man’s wife died several years ago. He no longer needed the $300,000 policy he has been carrying to protect against his premature death. He could have cashed it in, but it only had a cash value of $518. So he asked his agent to research a life insurance settlement and sold it for $53,000, paid off all his credit cards, went down to the dealership, plunked down cash for a new car and took a vacation.

Finally, let’s look at a 65-year-old man who has a 10 year term policy that he bought when he was 55. In a couple months, it will expire. Even though term insurance has no cash value, he was able to sell it for $8,400.

The final example reminds us to never rule out a term policy life insurance settlement. It is often quite surprising to see what that apparently worthless policy will bring.

The bottom line is this: if you are age 65 or older and you have any kind of life insurance policy that is no longer needed or fits one of the examples I have described, you might do very well to take a good long look at a life insurance settlement.

Robert D. Cavanaugh, CLU is a 39-year veteran of the life insurance, financial and estate planning industry. He publishes The Smart Giver, a planned giving educational series which advances techniques to increase income and reduce taxes while simultaneously helping churches and non-profits. More information about how a life insurance settlement can be used for fundraising can be found on his blog.