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Convertible Term Policies - Finding Hidden Money
As many people know, there are 3 types of life insurance policies that are sellable in life settlements. Whole Life, Universal and Convertible Term Policies, with the Universal policies being the most desirable.
The idea of selling a convertible term policy in a life settlement makes a lot of sense. The policy will terminate at the end of the term and the insured will have nothing to show for all of the premiums they've paid. When compared with Whole or Universal Life policies, term insurance is much like renting a house, while the aforementioned permanent life insurance policies are like owning a home. For term policies, when the lease is up the policy holder has nothing to show for it. While a permanent policy (a.k.a. Whole or Universal Life) may have some value or equity that can be realized in a sale. So why not take a convertible term policy that is going to end and then sell it in a life settlement?
A few years back, convertible term policies were very popular in life settlements. Since the seller essentially gets something for nothing these transactions were being done by insurance agents everywhere. Then the life settlement industry changed almost overnight. Life expectancies were drastically increased by actuaries, which forced life settlement buyers to look for older and older insureds in order to preserve their target rates of return.
The domino effect trickled down to convertible term policies. A few years back, anyone over the age of 65 was a viable life settlement candidate. With the adjustment in the life expectancy tables, only policies insuring people in their 70's and ideally in their 80's or older were being purchased. Most insurance companies require a term policy to be converted by the insured's 70th birthday. So if buyers want insureds in their late 70's or older, but term policies can't be converted after age 70, the convertible term policy sale as a life settlement seemed destined to disappear. No buyer would be interested in a term policy that couldn't be converted into permanent insurance. The risk of getting no return on an investment is just to great. For the most part, there were enough Universal policies to satisfy the market's appetite and convertible term policies became undesirable.
Some good term policies consequently got shut out of the market. A few life settlement buyers have recognized this market fact and are now actively buying convertible term policies. An area of opportunity now exists for life settlement buyers and policy sellers with convertible term policies. For insureds aged 65-70 with some health conditions, their convertible term policy may have value. Institutional buyers are purchasing convertible term policies insuring people with life expectancies of 16 years or less. This "sweet spot" allows buyers to convert the policy into permanent insurance while at the same time making an investment that won't take above industry averages to generate a return.
The net result is that for most people, their current convertible term policy won't have value as a life settlement. However for a small group of policy owners (and insureds) selling their convertible term policy may equal something for nothing. If you have a term life insurance policy and want to learn more, please contact a life settlement broker.