Why is second-hand life insurance bought and sold?
[social_share]Life insurance can often be sold when it’s not needed any more. It’s quite a good idea to understand why this is the case, and so whether there could be a price for life insurance owned but no longer needed.
The life insurance that tends to have resale value is a policy taken out for a long period of time. Most such life insurance policies have fixed premiums over that time span, because buyers who are met with rising premiums on the same life insurance policy are far more likely to cancel it halfway through.
As the insurance buyer ages, their life expectancy decreases, putting upward pressure on the cost of that insurance. However, if the premium is fixed throughout the insurance term, the provider must calculate sufficient “room” in the premium in advance to allow for that upward pressure. In effect, the premium is more expensive at the beginning of the term, when the policy holder is younger, and less expensive at the end, when he or she is older. This is in comparison to what the premium would be on a life insurance policy that was recalculated annually.
After some years have been spent paying these premiums, some value accrues in the life insurance policy. This is because the premium, which is still at the same price, is far lower than the anticipated payout amount for the insured person. This is particularly the case if that person’s health has deteriorated over the years.
This is why a number of investors are prepared to buy life insurance policies. They will agree to pay the premiums, and pay a capital lump sum, in exchange for collecting the payout if the policy holder dies while covered by that policy. Life insurance companies are also sometimes willing to pay a “surrender value” on these policies, although this tends to be lower than the amount offered by investors.
For a life insurance policy holder, the usual reason for selling is the insurance is no longer needed and is expensive to maintain.
