Why Do People Let Their Life Insurance Policies Lapse?
Fast Facts About Letting Life Insurance Lapse:
Most Americans in their sixties own a life insurance policy that may provide valuable financial support for their own retirement, while they are alive, but they often just don’t know.
92.5% of all the life insurance policies that ceased to be in force in 2018 were terminated by their policy owners (out of which 75% lapsed, 17.5% were surrendered).
Retirees are 25% more likely to have policies lapse than the general population when they face limited income (which is often coupled with premiums that grow year after year).
Too often people let their life insurance lapse because they just don’t know they have other options.
But not you! You’re about to learn some important facts about those other options. That way, whatever you choose, you’ll be making an informed decision about your insurance options.
First, let’s start with the obvious. Owning a life insurance policy is very common in the US. So common, in fact, that there is currently a stockpile of in-force (that means active) life insurance policies worth more than $21 trillion in death benefits. Wowzers.
Most folks from the age of 65 on up own either permanent or term (which, importantly, is often still convertible into permanent) life insurance. However, over 90% of individual life policies are either lapsed or surrendered. Sadly, in both cases, no death benefit is ever paid. Another wowzer.
While not all the life insurance policies that are terminated before paying out a death benefit would be eligible for a sale in exchange for a lump sum of cash in the context of a life settlement transaction, many of those policies could have netted a substantially higher sum of money to their owners. This explains why as much as 90% of the individuals that have terminated their life insurance policies (without knowing they could sell them instead) say they would have considered a life settlement if they knew they had this option.
Lots of Policies Lapse – Some Don’t Have To
According to the 2019 Fact Book of the American Council of Life Insurers (ACLI), in 2018 approximately 7.7 million policies with an aggregate death benefit of more than $550 billion lapsed. That means policyholders received nothing, nada, zero, zilch.
Instead of lapsing, an additional 1.5 million policies were surrendered to the issuing life insurance carriers in exchange for the cash surrender value. Those surrendered policies had an aggregate death benefit of $133 billion. Cash surrender sounds better than lapsing but it’s still a contractual amount that is, on average, one-fourth of the value paid out to the policy owners who opt for a life settlement.
The most astonishing figure from the ACLI is perhaps this: $57 billion. That’s the amount that was paid out in death benefits by life insurance carriers in 2018. You read that right. $550 billion dollars worth of policies lapsed and only $57 billion was paid in death benefits. That’s just crazy. It’s also a very profitable equation for life insurance companies. Maybe that’s why it’s not better understood.
Here is What You Need to Know
In percentage terms, if we look at the policies that ceased to be in force for any reason in 2018:
92.5% of all the life insurance policies that ceased to be in force during the year were terminated by their policy owners (out of which 75% lapsed, while a further 17.5% were surrendered);
Only 7.5% of all the life insurance policies that ceased to be in force during the year actually paid out a death benefit upon the death of the life insured person.
It’s Time to Get Smart About Lesser-Known Options
Lapsing a life insurance policy without considering all available options isn’t a smart move. That’s especially true if the desire to terminate that life insurance policy is linked to financial difficulties. For older people, those financial difficulties often result from health care expenses that erode available income.
For example, a white paper by the nonprofit Family Reach and consulting group Xcenda explains that adult patients with cancer are 2.65 times more likely to file for bankruptcy than adult patients without cancer. Also, cancer patients who filed for bankruptcy had a 79% greater risk of early mortality than patients who did not file for bankruptcy. These are difficult, but important, statistics.
These numbers remind us how important it is to use all available financial resources in a smart way, especially as we age. Retirees are 25% more likely to have policies lapse than the general population when they face limited income coupled with premiums that grow year after year.
A life settlement is often viable for retirees but they can’t even explore this option if they don’t know about it. When selling a life insurance policy instead of lapsing or surrendering generally provides extra financial resources, combined with the elimination of recurrent premium payments (which are no longer necessary), what wouldn’t smart policy owners check it out? Short answer: they would. And now you can too.
While keeping life insurance isn’t always an option, it’s smart to check into all your options before allowing a policy to lapse.