The most noticeable difference is that term life insurance provides death benefits only for a specific time period (aka the “term”) with no cash accumulation, while whole life insurance provides death benefits while it accumulates cash over the course of the insured’s entire life.
But did you know that is NOT where the story ends? If you bought a term policy —and lots of people do for lots of good reasons— you probably have no expectation that it would ever have any real cash value. Maybe you got a term policy upon the recommendation of your CPA or banker who wanted you to have some coverage for loans on real estate or a buy-sell agreement. Whatever the reason, you are not alone.
Term insurance is the default option in the industry because it is the least expensive type of life insurance, specifically for the reason we already highlighted—it does not have or build any real cash value. Ordinarily, term policies are lapsed or not renewed when the insured reaches the end of that specified term.
Then what happens to that policy after it ends? For most people, it goes into the garbage. I have some good news—that doesn’t have to be the fate of your term policies. So how can these policies have value when most people think they are not even as good as the paper they are printed on after they expire? I’ll tell you exactly why and when they can have value.
One of the attractive features of most term policies is that they give the insured the option to convert the policy to a permanent policy up to a certain age (normally 70 or 75 years). Typically, this exchange requires neither underwriting nor a medical exam. This is good news for policy owners because it means they can convert a term policy into whole life insurance even if their health has started to decline.
It is important to understand that the premium’s new rate will be based on the age of the client at the time of conversion. Even if their health has declined, they are guaranteed the option to convert at the same health rating they earned when they originally took out the term policy.
Of course, the overall cost of whole life insurance is greater than the cost of term, but the potential arbitrage or value is the promise they can convert at their “old” health rating. So obviously, a term life policy can offer you the advantage of conversion to a whole policy. But chances are, you already knew that. Some people, however, don’t have any intention of converting their term policy to whole life. What about them? Is there any way to turn that policy into something more? Absolutely!!
Policy Review Outcomes;
Recently a CPA referred a client to me who owned a $1.5 million term policy. Rick, the policy owner, had no desire to keep or convert the policy. At 68, his health had only changed moderately and he was in need of some extra cash now, not later (I’m sure we can all relate to that). Fortunately, there was a buyer willing to pay $60,000 gross ($45,000 net) to Rick. He was delighted to get cash in hand for a piece of paper he was perfectly willing and already planning to throw into the garbage!
Another case referred to me was a client named June who had a large $10 million term policy with attractive convertible options. She was turning 75 and was very wealthy. Her children were even wealthier than she was, so there was truly no need for the policy on an ongoing basis. Nice problem to have, right? She was extremely philanthropic and she was ecstatic when I told her that she would be able to donate the $250,000 she received from selling her policy to the charities of her choice.
June and her husband were so happy that they shared their story with one of their neighbors, the Tuckers, who then called us to see if we could do the same for them. They also owned some term policies they were not planning to convert. We were successful in getting the Tuckers every penny they had previously invested in their policies over a fifteen year period—and an extra $100,000 over and above that.
CPAs and other finance professionals have so many clients with term policies, which is why it’s important for them to be aware of the possibilities in this area and the many doors these cash payments could open for those who need money now or for those who wish to be more philanthropic. In short, they should become familiar with what is known as life settlements.
A life settlement involves selling an asset—a convertible term policy, for example—for more than the asset’s cash surrender value, but less than the net death benefit. It can serve as a highly valuable source of liquidity for policy owners who would otherwise surrender a policy or allow it to lapse or for people whose life insurance needs and priorities have changed.