Group life insurance policies, as well as key individual insurance policies, may qualify for a life settlement under certain conditions.
Like any other life settlement scenario, the insured should be over 65 years of age. Seniors and people with a serious and life-threatening illness tend to represent more value in a life settlement situation because their average life expectancy is shorter - which is of interest to investors willing to purchase the policy for an up-front cash amount.
Life insurance policies considered for a life settlement must be owned by the insured for a minimum amount of time before the sale — generally two years.
This requirement varies by state and is determined by the state of residence of the person who pays the policy premiums.
Only term life, whole life, and universal life policies that are specifically convertible into a permanent policy are eligible for life settlement. Premium financed and standard term policies present too high a risk to investors.
The value of the life insurance policy in question must have a death benefit of over $100,000 so the settlement has the potential to produce an attractive profit for potential investors.
Each life settlement transaction is subject to the same cost structure, regardless of the death benefit amount. For this reason, larger policies are sought-after and more profitable for the seller.
Assessing a group life insurance policy for a life settlement
There are several additional factors that must be considered for an individual with a group life insurance policy to qualify for a life settlement. The policy must be a convertible term or permanent policy that is transferrable.
Since the potential benefits of a life settlement are not well-known among the general public, and even among human resource professionals who have a duty to educate employees about their options upon retiring or leaving employment, many people with life-threatening illnesses or people who have decided to retire after the age of 65 simply walk away from their life insurance policy upon leaving their employer.
They may also continue to pay the premiums without the employer’s supplement.
Here are a few instances when a life settlement from a converted group life insurance policy could benefit an individual and their family:
A seriously ill client leaves his employer and is able to use his life settlement funds to cover the higher cost of COBRA (Consolidated Omnibus Budget Reconciliation Act) health insurance premiums and pay medical bills, alleviating some of the financial strain associated with a decreased or stopped income and medical bills.
A seriously ill client who has left her employer and converted her group life insurance policy participates in a life settlement so she can cover the costs of health insurance after her COBRA eligibility expires instead of being forced into major life changes like downsizing by selling her home.
A recently retired client with grown children no longer requires $500,000 worth of life insurance like he did when he was raising a family, but converted his group policy upon leaving employment anyway. The proceeds of a life settlement may be added to other financial products to enhance his retirement standard of living.
Assessing a key individual life insurance policy for a life settlement
When an insured executive leaves a company, the company typically must make decisions about what to do with the life insurance policy they hold on their former employee. There are three options that most companies consider; let the policy lapse, surrender the policy for cash value, or collect the death benefit when the former employee dies after paying premiums until that time.
For companies who hold life insurance policies on executives they no longer employ, the prospect of gaining immediate value from the policy is attractive. Purchased in part to defray the cost of bringing a new person up to speed upon the untimely death of a partner or top executive in a company, a life settlement with this type of life insurance offers the benefit of a quick cash infusion that insurance professionals should be prepared to explain.
The sale of a key individual life insurance policy may be used to pay creditors, to raise cash in the face of bankruptcy, or when a business is being liquidated. Of course, individual companies have different needs, so it’s important that insurance professionals fully understand their individual situation before recommending a life settlement.
Here are some scenarios where a business benefits from participation in a life settlement for a key employee life insurance plan:
A company is considering a cash surrender of the $10 million-dollar life insurance policy it holds on its CEO because the premiums are huge expense and they are negotiating the sale of the company to a strategic buyer. The cash surrender value is less than one million dollars. In this case, a life settlement is likely to yield a much higher return for the company.
After terminating its CEO, a company is faced with the decision of whether to pay a $40,000 premium on a $4 million-dollar key life insurance term policy with no cash surrender value. Before letting the policy lapse, the CFO contacts a life settlement company and learns that because the insured was over the age of 65 and in poor health, the policy is a candidate for a $750,000 cash settlement.
Just months before their CEO retired, a company was faced with the difficult decision of whether to pay a policy premium that would double during the next year on a $3 million-dollar term policy with no cash value. The insured was 70 years old at the time and in decent health, but retiring because of his age. They decided to let the policy lapse, but upon contacting a life settlement company they found that the policy could be exchanged for $500,000 cash.
It’s obvious that life settlements provide measurable advantages in certain situations for both individual life insurance policy holders and for companies that pay high premiums for key person policies.
Understanding the life settlement option allows the financial professional to provide timely and valuable counsel to clients that may have otherwise left piles of much needed cash on the table by letting their life insurance policies lapse or accepting a small cash value payout.