The Big Misunderstanding About Term Policies

Many advisors believe that term life insurance policies are worthless once the need is gone or the term expires. But there’s a big opportunity that most advisors miss out on with term policies, and they’re letting it slip through their fingers.
Term life insurance policies sometimes get a bad rap. They fulfill an obvious need in the market, helping people with a specific need for life insurance for a set amount of time. They’re a great “just-in-case” option, and one that the policy holder doesn’t need to continue paying for after the need is no longer there.
Though, it must be said: it can certainly feel like you’re letting a lot of money simply wash away after the need is gone or the term expires on the policy. That’s why term policies don’t always get the credit they should—it may sometimes be difficult to justify the investment in them when there’s no ROI whatsoever.
That’s the big misunderstanding, though. Term policies can provide ROI. It’s just that more often than not, advisors don’t think about the option that can make the policy fruitful.
Odds are, when the policy was sold to your client, it included a convertible rider that allows the policy to convert it to a permanent policy. It’s a great safety net that allows someone who may have become uninsurable during the policy’s term to keep the policy. But that rider does more than that: it allows the policy to be sold in a life settlement, providing return that otherwise simply wouldn’t exist.
With the policy converted to either a universal or whole life policy, you can determine if it’s a good fit for a life settlement. A life settlement is the sale of a person’s life insurance policy to a third-party investor. In a life settlement, the policy’s owner transfers the ownership of that policy in exchange for an immediate cash payment from the buyer. Candidates for life settlements are typically 70 or older, with a life insurance policy that has a “face value” (death benefit) of more than $100,000.
Let’s consider an example. Mr. Nixon, a retired father of three, had a convertible term policy with a value of $3.5 million. The term was expiring, so he was debating letting the policy lapse. Yet his advisor suggested a valuation on the policy. He converted the policy, and then sold it in a life settlement for $350,000. Just imagine: he was going to let the policy simply lapse, and get nothing in return. Instead, he received $350,000 to invest in other, more lucrative investment opportunities.
Term policies don’t deserve the negativity they sometimes receive. They’re a perfectly viable and worthwhile investment option, as long as you understand the full scope of the opportunities they present.