You have probably heard that term insurance is the most efficient way to purchase life insurance. Suze Orman has been saying that for years; she is right. The cost of term life insurance is lower because there isn’t an accumulation of cash value like other policy types. Your premium payments are used exclusively to pay for the face amount of life insurance purchased.
Term life insurance is not an investment; it’s life insurance.
It is very important to note that term life insurance, like all other life insurance could be a hidden asset. Term insurance can be a valuable estate planning tool, and can in fact, be used to obtain cash! Here is a recent example.
A 79-year old woman from the Northeast contacted me about the potential of obtaining liquidity from her term life insurance policy. She didn’t need it any longer. But, it was a term life insurance policy. So, was it salable?
Fortunately, this $1 million Prudential term life insurance policy was convertible up to her 80th birthday. And that was just a few weeks away.
Since the policy wasn’t needed, and it was desired to sell if possible to gain cash now, it was imperative to convert the term policy to one that would be preferred by purchasers in the marketplace. What type of life insurance policy would the private equity companies most desire? The goal here is to convert the term policy to a new permanent policy that the private equity bidders will pay the most for.
It was determined that a specific Prudential universal life insurance policy was most desired by the private equity firms that typically bid on these policies. So, we converted the term policy to a new permanent life insurance policy for the same amount, $1 million, just a few days before her 80th birthday. This was absolutely necessary if we were to obtain value for our client. Otherwise, she would not have the right to ever convert it to a permanent policy.
By the way, annual premium payments increased dramatically on the new universal life insurance policy to $54,000/year, from $12,000/year on the term policy. In order to provide the most value to this client, we managed the sale of the new policy to coincide with its conversion; therefore, minimizing the number of higher premium payments she needed to make.
To summarize, instead of allowing a term life insurance policy to be surrendered for nothing, we were able to provide our client more than $40,000 in value!
The lesson here – never allow your term life insurance policy to lapse unless you consider that after conversion, it could be marketable and provide liquidity! In fact, never allow any life insurance policy lapse unless you talk with us first.