Most life insurance policyholders know one number: the death benefit.
Some may also know the policy’s cash surrender value. But fewer understand that an eligible life insurance policy could potentially have another value altogether: its value on the secondary market.
As Life Insurance Awareness Month continues, advisors have an opportunity to help clients better understand the policies they already own, including what those policies may be worth today.
At Abacus Life Solutions, we believe understanding the value of an existing policy can be an important part of making informed financial decisions.
One Policy, Different Types of Value
A life insurance policy can have different values depending on what happens to it.
Understanding the distinction can help advisors and clients evaluate their options more effectively.
Death Benefit
The death benefit is the amount the insurance company pays to beneficiaries when the insured passes away, assuming the policy remains in force and applicable requirements are met.
Cash Surrender Value
For policies that accumulate cash value, the cash surrender value is generally the amount available to the policyholder if they surrender the policy to the insurance company, subject to the policy’s terms, loans, fees, and other adjustments.
Potential Life Settlement Value
For eligible policies, there may also be value in the secondary market. A life settlement allows a policyholder to sell their policy to a third party for a lump-sum payment. The buyer assumes responsibility for future premiums and receives the death benefit when the insured passes away.
A life settlement offer may exceed the policy’s cash surrender value, although eligibility and offers vary based on the individual policy and insured.
Why Cash Surrender Value May Not Tell the Whole Story
When a client decides they no longer need or want a policy, surrendering it to the carrier may seem like the obvious next step.
But before making that decision, it can be worthwhile to determine whether the policy qualifies for a life settlement.
A policy’s potential secondary-market value can depend on several factors, including:
- The insured’s age and health
- Policy type and death benefit
- Current and projected premiums
- Policy performance
- Other policy-specific factors
This is why two policies with similar death benefits may have very different potential settlement values.
When Should Advisors Consider a Policy Valuation?
A policy valuation can be particularly relevant when a client is considering surrendering or lapsing coverage.
It may also make sense when a client:
- No longer needs the original death benefit
- Is facing increasing or burdensome premiums
- Has experienced a change in health
- Has updated an estate or legacy plan
- Has sold a business or completed a succession plan
- Wants additional liquidity for retirement, healthcare, or other financial priorities
A valuation does not mean a client has to sell. It simply provides another piece of information that can help them compare their options.
Awareness Means Knowing What You Own
Life Insurance Awareness Month is about understanding the role life insurance plays in a financial plan.
That should include more than knowing the death benefit.
For clients with policies they no longer need or are considering surrendering, understanding the policy’s potential secondary-market value can help ensure they have more information before making a decision.
Sometimes the right choice will be to keep the coverage. Other times, surrendering it may make sense. And for eligible clients, a life settlement may provide another alternative worth considering.
The important part is knowing the options before making the decision.
Find Out What Your Client’s Policy Could Be Worth
Your client may know their death benefit and cash surrender value. But do they know what their policy could be worth on the secondary market?
