1. Surrender the policy back to the insurance company for its cash value.
2. Let the policy lapse, possibly making all your premium payments worthless.
But now there is a third option: selling the policy to an entity other than the insurance company that issued the policy in a transaction called a life settlement. The life settlement company continues paying the premiums and receives the death benefit when you die.
Life settlements grew out of viatical settlements, which bloomed in the 1980s as a way for AIDS patients and other terminally ill policyholders to tap into some cash before they died.
Viatical settlements are arranged only for people with life expectancies of fewer than two years. But life settlements generally cover people 65 and older who have life expectancies of between two and 10 years.
The big picture
Many insurance salespeople express enthusiasm for life settlements, which can offer 10 percent to 50 percent more cash than surrendering policies back to the insurer, with payment ranging from 10 percent to 80 percent of the policy’s face value.
“The life settlement world is a murky swamp.”
“My feeling is that life settlements provide older individuals who own life insurance today with an alternative that creates real value for the capital they have invested in their policies,” says Allan Goldstein, president and CEO of Insurance Design Center, a fee-based adviser in Deerfield, Ill.
“The settlement industry breaks a 100-year-plus monopoly that the life insurance industry had for what individuals could retrieve by surrendering their policies,” Goldstein says.