June 26, 2020

Term Life Insurance: What Policy Holders Need to Know

While working with our life settlement clients we have found that life insurance, with all its variations and types and riders, can be confusing. Here are five things every term life insurance policy holder needs to know about their policy:

    1. When the policy expires, there is no payout When a term life insurance policy expires, or terminates, the life insurance company does not pay out a death benefit. Term life insurance is considered non-permanent life insurance and it does not grow cash value, so there is no residual cash value in the policy either. One thing that can be confusing is that a life insurance representative may refer to the expiration of the level term period, but the policy can often be continued past that point (though at a much higher premium). So while the level term premium is expiring, the term policy itself can still be kept in-force; as opposed to after the policy’s termination date, also known as the maturity date, the policy will end.
    2. The insurance carrier must pay the named beneficiary Even if your situation has changed since you took the life insurance policy out, the insurance company is legally obligated to pay only the named beneficiary(ies) on the policy. So it is important to keep that designation up to date as life makes its twists and turns.
    3. Minor children cannot receive life insurance proceeds Not directly— any life insurance proceeds paid to a minor child must go through a lengthy, and sometimes costly, probate court process to appoint a guardian until the child turns 18 (or the age of majority in the given state).
    4. Many term policies are convertible to permanent life insurance Many term life insurance policies can be converted up to a certain age, or until the level term period has passed. A permanent life insurance policy is more expensive than a term policy, but they often also accrue value over the course of the policy (in some cases, only if you pay in more than the minimum premium amount), which allows for a policy loan or partial withdrawal down the road if it is needed.
    5. Term policies can qualify for a Life Settlement Most people assume that since a term life policy does not have any cash value, that the policy has no value. This is not true in every case, and increasingly seniors are learning about the value of life settlements to tap the market value of their life insurance policy, including term life insurance. A life settlement is a transaction where a life insurance policy holder sells their life insurance policy to a third party for more than the cash value, but less than the death benefit. The original owner receives a cash payment in the amount of the life settlement offer, and the new owner pays all of the life insurance premiums moving forward.

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