Converting Term Life Policy Can Produce Windfall

Elderly holders of term life policies do not have to lose all that they have paid into the policy. Your term life policy could be converted to a whole life or universal policy ahead of its expiration. This new policy can then be sold in a life settlement process that can net you a portion of the premiums you have paid into it. Understandably, this process is growing in popularity as more term-life holders learn about it.

Allowing any type of life insurance policy to lapse can be a major financial error. But letting a term life policy that is near expiration lapse is now an opportunity to reap a bit of a windfall, providing funds that can be applied to current expenses or perhaps an annuity for a surviving spouse.

Converting a policy involves first, having a term policy that is convertible. Then, the policyholder converts it to a permanent policy before it expires. The last step is to seek a settlement on the permanent policy with a life settlement provider. Weigh the settlement offer; your agent can compute a likely settlement offer ahead of actually making the conversion.

Rules about Conversion

There are a few rules about what kind of term policies can be converted in this manner.

First, the policy has to be a convertible policy. You pay a slightly more in premiums, but it is well worth it to have options when the policy is up for renewal or termination.

Second, the policy has to have a face value of $500,000 or more.

Third, the policyholder has to be more than 70 years old. Be aware that some policies you buy have a stipulation that they cannot be converted if the policyholder is past the age of 75. As an example, if you are in your fifties, you could buy a convertible policy with a 20-year term, and have some financial options when it comes close to the expiration date.

Fourth, the policy must not have expired. Check the policy or check with your agent to make sure what the expiration date on your policy is. Schedule a chat re what your options are well before that date, so you have some time to mull it over, or discuss it with a spouse or other advisor.

Advantages and Disadvantages

The advantages include the fact that underwriting carries over from the expiring policy. In other words, you do not need to worry about qualifying for another life insurance product. Also there are no out-of-pocket costs for the policyholder. It takes a non-performing asset and turns it into found money.

The one major disadvantage is that the proceeds of the settlement may be taxable.

Final Thoughts

Converting a policy that you no longer need, or can no longer afford, can create a new nest egg or funds for immediate needs. You may wish to buy a long-term care policy, make a gift to a charity, university or church, or pay for hired help to enable you to stay in your own home. All of these are good reasons to buy a convertible policy rather than a plain-vanilla term life insurance policy, and then make a settlement on it.

SOURCES:

Advanced Settlements, Inc -- Keystone Players in the Life Settlement Marketplace, AdvancedSettlements.com, http://www.advancedsettlements.com/

Open Life Settlements Estimate Worksheet, OpenLifeSettlements.com, http://www.openlifesettlements.com/your_eligibility.php

Taylor, Don, Considering whether to convert term policies, Bankrate.com, Sept. 27, 2009, http://www.bankrate.com/brm/news/DrDon/20050927a1.asp