When most people think about the value of a life insurance policy, they naturally look to the number provided by the insurance carrier. If the policy has accumulated cash value, there is an asset to consider. If the cash surrender value is small, the policy may appear to have limited value. And if the cash value is $0, it is easy to assume there is nothing there.
But that assumption can overlook an entirely different measure of value.
For certain life insurance policies, particularly convertible term policies, the amount available from the insurance carrier and the amount the policy could potentially command in the secondary market are two very different things. A policy can have no cash surrender value whatsoever and still potentially be attractive to institutional buyers.
For financial advisors and insurance professionals, understanding that distinction can be important because it expands the types of policies worth evaluating before a client allows coverage to lapse.
Cash Value and Market Value Are Not the Same Thing
The confusion is understandable. For decades, policy owners have been trained to think about life insurance primarily in terms of the death benefit, premiums and, when applicable, cash value.
But a life settlement introduces another possibility: market value.
Cash surrender value is determined by the insurance contract and represents what the carrier may pay the policy owner if the policy is surrendered. A life settlement is different. It involves selling the policy to a third-party buyer, and the value is based on a number of factors that can include the insured’s age and health, the policy’s death benefit, future premium requirements, policy structure and the buyer’s own investment criteria.
That means $0 in cash value does not necessarily mean $0 in market value.
It simply means the policy does not currently provide cash surrender value through the carrier.
Those are two very different statements.
Why Convertible Term Insurance Is Especially Important
Convertible term insurance is one of the clearest examples of why advisors should understand this distinction.
A term policy typically does not accumulate cash value. If the insured reaches the end of the coverage period or decides the premiums no longer make sense, the natural conclusion may be to let the policy lapse.
From the client’s perspective, there appears to be nothing to recover.
However, some term policies include a conversion feature that allows the coverage to be converted into a permanent life insurance policy without requiring the insured to go through new medical underwriting, subject to the terms and deadlines established by the carrier.
That conversion feature can potentially change the conversation.
If the insured’s health has changed significantly since the original policy was issued, the ability to convert the existing coverage may have value. In the right circumstances, a life settlement buyer may be willing to acquire the policy and assume the future premium obligations.
Suddenly, a policy the client believed was worth nothing may represent a financial asset worth exploring.
The Policy That Is About to Lapse Is Often the One Worth Asking About
Consider a hypothetical example.
A client purchased a sizable term life insurance policy years ago to protect a family, support an estate plan or provide business-related coverage. Today, the original need for the insurance has changed. Perhaps the children are financially independent, the business has been sold, estate-planning priorities have shifted or the client simply no longer wants to continue paying the premiums.
The policy has no cash value.
The client tells the advisor, “I’m just going to let it lapse.”
Historically, that might have been the end of the conversation.
But if the policy remains convertible and the insured meets the criteria buyers are looking for, there may be another option. Before allowing the coverage to disappear, the advisor can have the policy evaluated to determine whether a secondary-market opportunity exists.
Not every term policy will qualify for a life settlement, and a conversion feature does not guarantee that there will be an offer. But the important point is that the decision should not be based solely on the fact that the policy has no cash value.
There may be another source of value that hasn’t been considered.
This Is Where Knowing the Market Matters
At SFS Life Settlements, we spend our time in the secondary market, working with institutional buyers and understanding what they are looking for.
That matters because there isn’t a simple formula that says a particular policy is worth a particular amount. Different buyers have different acquisition criteria, portfolio needs and approaches to valuation. A policy that isn’t attractive to one buyer may fit another buyer’s parameters very differently.
It is one of the reasons we consistently tell advisors that one offer is not a market.
The same principle applies even earlier in the process: $0 in cash value does not necessarily mean $0 in market value.
Our role at SFS is to help advisors determine whether an opportunity exists and, when it does, expose the policy to the market so buyers can compete for it. The advisor doesn’t need to become an expert in conversion provisions, buyer criteria or life settlement pricing. They simply need to recognize when a policy may be worth a closer look.
Expanding the Policies Advisors Think to Refer
One of the biggest opportunities we see is simply expanding the definition of what advisors consider a potential life settlement case.
It is relatively intuitive to ask about a settlement when a permanent policy has significant cash value. It is less intuitive when an advisor is looking at a term policy with a $0 next to cash surrender value.
Yet that may be exactly the policy worth asking us about.
The conversation can begin with a few basic questions. Is the policy still in force? Is it convertible? When does the conversion privilege expire? Has the insured’s health changed since the policy was originally purchased? Is the client planning to let the policy lapse because the coverage is no longer needed or the premiums no longer make sense?
Those questions don’t determine whether a policy has market value. They simply help identify situations that may deserve further evaluation.
SFS can take it from there.
Before a Client Walks Away From a Policy, Find Out What’s Possible
Life insurance is an asset, and like other assets, its value is not always represented by the most obvious number on a statement.
Sometimes a policy has significant cash value. Sometimes it doesn’t.
Sometimes it has none at all.
What matters is whether another market sees value in the policy before the client gives it up.
For advisors, that creates a simple opportunity to provide additional value to clients without needing to become a life settlement specialist themselves. Before a client surrenders or lapses a policy because it appears to have little or no value, have it reviewed.
At SFS Life Settlements, we’ll help you understand the policy, determine whether there may be a secondary-market opportunity and, when appropriate, take it to the market to find out what buyers are willing to pay.
Before your client assumes $0 cash value means $0 value, reach out to SFS. Let’s find out what’s possible.