What is Term Life Insurance?
Term life insurance, also known as pure life insurance, provides coverage during a specified length of time and guarantees the payment of a death benefit during that period. The shortest term policy available is for one year, and you can typically buy policies with terms that last up to 30 years, or until you reach a specified age. Term life insurance is usually not available for any term that would end past the policyholder’s 80th birthday, according to the Insurance Information Institute.
Purpose of a term life policy
Term life insurance is designed to give financial protection to beneficiaries against the insured person’s loss of life. A term life policy helps make certain that your loved ones will be able to take care of your funeral expenses, medical bills, debt and other financial obligations when you die.
Types of term life policies
The two main types of term life insurance are level-term and decreasing-term. The key difference between them is in the amount they pay in death benefits during the contract term of the policy.
Features of level-term life policies:
- Same death benefit is paid no matter when the death occurs within the term
- Premiums stay the same for a designated period, after which they increase
Features of decreasing-term life policies:
- Death benefit amount decreases over the contract term
- Premiums stay the same through most of the coverage period, but may be reduced later in the contract term
- Typically used to provide funds for the payment of mortgages and other types of expenses that decrease over time
How Does Term Life Insurance Work?
Death benefit
If the insured person dies within the specified term of the insurance contract, the policy owner’s beneficiary receives a cash benefit that equals the face value of the policy. However, if the policy owner outlives that contract term, there is no benefit payout.
Term life insurance premiums
Term life premiums are based on the age, health and life expectancy of the person covered by the policy. Some policies are automatically renewable – either annually, within a specified number of years or up to a certain age – for as long as premium payments are kept up to date. Premiums on renewable policies will typically rise at the start of each new term to reflect the insured person’s increase in age.
Some level-term life policies offer a Return of Premium (ROP) feature that provides a full or partial refund of premiums if no death benefits are paid out by the end of the term. This cash-back advantage raises the premium cost for term policies with an ROP.
Why buy a term life insurance policy
Term life insurance may be a good choice if your primary goal is to find an affordable way to cover the cost of your final expenses and the financial obligations you leave behind after you die. As the National Association of Insurance Commissioners points out, a term policy is often the best option for someone who is looking for the highest benefit amount for the lowest premium.
Since term life policies have no cash value apart from their death benefits, they also are best suited for those who have no interest in using their life insurance as an investment or estate planning tool. Let’s say you’re either single with no children, or your children are grown up, so you have no need to use a life insurance policy as a loan source to help pay for their college education. You’re not counting on life insurance to leave a large sum of money for your heirs to live on or to benefit your favorite charity. You simply want the peace of mind of knowing your loved ones will have enough money to cover some immediate financial needs after your death.
What Happens at the End of a Term Life Insurance Policy?
When a term life insurance policy expires, if you’re still around, there will be no payment to your beneficiaries. You have the option of either renewing the policy (as long as you are not past the age of eligibility), converting it to a permanent life insurance policy or letting it terminate.
Whole vs Term Life Insurance
Coverage and features comparison
While whole life insurance provides coverage for the entire life of the person being insured, the protection of a term life insurance policy ends when the contract term expires, unless the policy is renewed. Another key difference is that, unlike whole life insurance, term life policies contain no loan value and no savings or investment component for building up their cash value. The sole monetary value of a term life insurance policy is its death benefit.
Cost and premiums comparison
Term life insurance costs significantly less than whole life insurance. Since they provide coverage for a limited time and limit the age at which you can obtain coverage, most term policies expire before a death benefit ever comes due. For that reason, term life insurance represents a lower risk to insurers compared to whole life policies, which makes them willing to sell term life for lower premiums. In fact, a whole life policy can cost 10 times more per month than the same amount of coverage in a whole life policy. For example, Investopedia estimates that for a healthy 35-year-old non-smoker, a 20-year, level-premium term life policy with a $250,000 face value would cost $20 to $30 a month, compared to $200 to $300 a month for an equivalent whole life policy.
Can I Sell My Term Life Insurance Policy for Cash?
Convertible term life insurance
You can sell a term life insurance policy for cash, but your policy will usually have much more value on the market if it is the type that can be converted to a whole or universal life policy. The provision in a term life policy that allows for this change is called a conversion rider. It typically will enforce a time limit for making the conversion – generally before your term policy expires – along with an age limit of 65 to 70 years.
If you purchase a convertible policy, you can exercise your option to convert without the requirement of an additional medical exam to determine your health condition. The face value of your policy will typically stay the same when it’s switched, but your premiums will go up in light of the cash-building benefit of the new permanent policy.
Life settlements
Once a term life insurance policy is converted to a permanent policy, it’s possible to sell it through a life settlement, which is the sale of a life insurance policy for cash. In this transaction, the seller receives a cash payment that is greater than the cash surrender value of the policy (what you get if you voluntarily cancel your policy) but less than its death benefit. The buyer assumes payments of future premiums and receives the policy’s death benefit when the insured person dies. You must be at least 65 to be eligible for a life settlement, and some life settlement companies, including Harbor Life, require you to either be age 70 or older or have a severe medical condition.
A life settlement company will underwrite your policy and present it to institutional investors who may be interested in purchasing the policy. With a settlement organized by Harbor Life, you can get up to 40% of your policy’s value in cash, often in a matter of weeks (although each case is unique, and they do sometimes take longer). With other life settlement companies, the process can take as long as six to nine months.
How to Sell a Term Life Insurance Policy
To sell a term life insurance policy through a life settlement, you’ll need to follow these steps:
- Determine if your policy is convertible: In general, only convertible term policies are eligible to be sold, so your first step should be determining if your term policy can be converted into a permanent policy. You can review policy documents, contact your insurance carrier, or connect with a life settlement company to determine if your policy can be converted. Sometimes, term policies may have a rider that allows them to be converted, so be sure to review insurance documents carefully. In some cases, non-convertible term policies can be eligible, but this is usually only in cases where the insured has severely impaired health.
- Contact a life settlement company: To sell your policy, you’ll need to work with a life settlement company like Harbor Life Settlements. A life settlement company will handle most of the work for you, starting with contacting your insurance carrier to get the necessary documents and requesting medical records (both done with your consent in writing, of course). Then, they will underwrite the policy sale and identify one or more institutional investors who may be interested in acquiring your specific policy. Some investors prefer large face amounts ($1 million and up), while others prefer small policies, and others don’t have a preference. Similarly, some investors prefer insureds with impaired health, while others favor healthy insureds. The life settlement company, who has access to a broad network of institutional investors, handles the heavy lifting on your behalf, and provides you with a fast, fair offer to purchase the policy for a lump sum cash payout.
- Sign paperwork to finalize the transaction: If you accept the offer to purchase your policy, you’ll need to sign paperwork to officially transfer ownership of the policy. Here again, your life settlement company will help you through this process and make it as simple as possible for you. Once everything has been signed, a lump cash sum will be deposited into your account and the buyer becomes the policy’s owner.
Pros and Cons of Selling Your Term Life Insurance Policy
Pros
Selling your life insurance policy can be a good move if your policy is no longer needed or affordable, and you need cash for your living expenses. You can use the money to boost your retirement savings, pay your medical bills or cover your long-term care costs.
If you’ve been diagnosed with a terminal or life-threatening illness, you have another option for getting cash from selling your life insurance called a viatical settlement. Unlike with traditional life settlements, there is no minimum age requirement for a viatical settlement.
Cons
Selling your life insurance policy for cash isn’t the best option in every situation. For instance, if you have long-term care needs or have been given a short life expectancy because of a serious illness, you may come out better by obtaining a policy rider that allows you to withdraw some money to pay for your care while keeping a portion of the policy’s value for your beneficiaries.
An accelerated death benefit rider allows someone who has received a terminal diagnosis, needs an organ transplant, is in hospice care or requires assistance with daily tasks like bathing and using the toilet to take a cash advance from the policy. The money can be used for medical treatments and personal care. A long-term care rider is specifically designed to pay for long-term care expenses of people who are unable to independently perform at least two of the essential daily living tasks.
If you don’t need life insurance protection for your survivors, converting your term life policy to a permanent policy and selling it can be a good way to generate cash for your retirement or for covering your medical or long-term care expenses. A financial advisor can help you consider your personal financial needs and goals, weigh your options and make the best decision for you and your family.
