Have You Considered Selling Your Life Insurance Policy?

 In Practical Matters

If you are considering dropping your life insurance policy because you can no longer afford the premiums or no longer need to provide the money for your heirs, first check out whether you would be better off selling it. There is an after market for life insurance policies fueled by investors who have calculated that they will make money by buying insurance policies, paying the premiums and ultimately receiving the death benefits.

Don’t be worried that the buyer will decide to enhance its investment by taking steps to accelerate its collection date. This only works because the investment pools buy up thousands of policies and have calculated the actuarial odds based on large numbers. Your own longevity is only one statistical point in their data.

Of course, the insurance companies have also studied the actuarial records and have set the premiums accordingly. The reason investor purchased life insurance works is that in setting their premium levels the life insurance companies have calculated that a certain percentage of policyholders will drop their policies before they die. The investors are taking advantage of this by upending that assumption. Over time, if a lot of polices are sold to investors rather than being dropped, insurance companies will have to raise their premiums. This will make the purchase of policies less profitable and eliminate this secondary market. Nevertheless, in the meantime, you may benefit from the market if you’re considering permitting a policy to lapse. It’s at least worth checking out.

Your insurance agent should be able to help you with this or refer you to someone who can. The larger the policy and the older and sicker you are, the more likely you will be able to find a buyer.

As an interesting aside, about 10 years ago, many investment pools were even more aggressive, paying for healthy older individuals to take out life insurance policies, which they would subsequently sell to the investors. These were referred to as STOLI polices for “stranger originated life insurance.” Often they were large policies in order to make the numbers work for the investors and because of their size were of great concern to insurance companies. Fortunately for them, and perhaps for the health of the insurance market, the insurance industry was successful in denying payment on these polices under the doctrine that life insurance may only be sold to those with an insurable interest, meaning the individual whose life is being insured, his family members, or his business associates. The success of these challenges in court put an end to the STOLI gambit.

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