Earlier this year we started the TOLI Challenge with the question: What is most important when determining the liability of a trustee’s actions? Click here for that answer. Today, we have a follow up true or false question.
Only permanent life insurance policies can be sold in the life settlement market, True or False?
It may surprise you that the answer is false – some term policies actually can be sold. Term policies, without cash value, are most often surrendered back to the carriers for no value when, under the right circumstances, they can be sold into the secondary market, providing the trust with additional cash that can be passed down to the beneficiaries or used to fund other policies.
The key is whether the policy is still convertible. As you may know, term policies can have a feature that allows the policies to be converted to a permanent policy with the same carrier at the same underwriting class but at the new age of the insured. So, a term policy taken out on a 45-year-old insured ten years ago and initially underwritten as a preferred risk can be converted to a permanent policy at preferred rates for a 55-year-old – without the insured going through the underwriting process.
Most conversion options are for a limited period, or to a certain age, so you must check to see if the term policy conversion option is still available. If it is, the policy may be marketable.
To see if it is, you will have to ask the carrier to provide you with a conversion illustration showing the premium requirements for the new permanent policy. Once obtained, you can contact a life settlement broker who will review the policy costs and the health records of the insured to determine whether the policy is saleable and at what price.
Not only are convertible term policies often sold into the secondary market, they rank just behind current assumption universal life policies, as the most popular life settlement policies. However, most TOLI trustees are unaware of this opportunity. The fiduciary duty of a TOLI trustee includes maximizing the value of the asset in their trust – even a term policy that appears to have no value.