Life Insurance in Retirement: When to Keep It, When to Sell It, When to Convert It

By Rodney Cummings | Legacy Wealth Services | Oregon License #18847712

You’ve been paying life insurance premiums for twenty, thirty, maybe forty years. The kids are grown. The mortgage is paid off. Your spouse has retirement income covered. And you’re sitting on a policy that could be worth a lot more than you think — in ways the insurance company has no incentive to explain to you.

This is the conversation most retirees never have: what do you actually do with your life insurance in retirement?

There are four options. Most people only know about two of them. Let’s walk through all four — honestly — so you can make the decision that’s right for your situation.

Option 1: Keep It (The Right Reasons vs. the Default Reasons)

Keeping your life insurance in retirement makes sense in specific circumstances:

✅ Keep it if:

You have a surviving spouse who would face a significant income gap at your death (Social Security survivor benefit alone may not be enough)
You have a taxable estate and the policy is in an Irrevocable Life Insurance Trust (ILIT) to provide estate liquidity
The policy has accumulated significant cash value that is performing as a tax-advantaged asset (see IUL strategies)
You have a dependent with special needs who will require lifetime support
You have a buy-sell agreement for a business funded by the policy
The premiums are genuinely affordable relative to the benefit provided

⚠️ Don’t keep it just because:

“I’ve been paying for it this long, I might as well keep going”
“It’ll leave something for the kids” (if you can’t comfortably afford the premiums, this is expensive inheritance planning)
“I’m not sure what else to do with it”
The insurance company hasn’t offered you any alternatives

The sunk cost of past premiums is not a reason to continue paying. The only question is: does the policy make financial sense going forward?

Option 2: Surrender It (Usually the Worst Option)

Surrendering a permanent life insurance policy means canceling it and receiving the cash surrender value — what the insurance company will pay you to walk away.

Here’s the problem: the cash surrender value is almost always significantly less than what the policy is actually worth in the open market. Insurance companies set surrender values based on their internal pricing — not on what the policy’s death benefit is worth to a third-party investor.

When surrender might make sense:

The policy is pure term with no cash value and the coverage is no longer needed
You have a small universal life policy that’s nearly lapsed and has minimal cash value left
The policy face value is under $50,000 and doesn’t qualify for a life settlement

When surrender is a mistake:

Any permanent policy (whole life, universal life, variable life) with a face value over $100,000
Any policy where your health has declined since issue (your policy becomes MORE valuable on the secondary market when your life expectancy has decreased — this is counterintuitive but critical)
Any term policy that has a conversion option you haven’t explored

Before surrendering any policy, get a free life settlement evaluation. You have nothing to lose — it’s a comparison of offers. The information is free; only continuing to pay premiums costs money.

Option 3: Sell It — The Life Settlement

A life settlement is the sale of an existing life insurance policy to a third-party investor for a cash payment greater than the surrender value but less than the death benefit.

This is a regulated, legal transaction that has existed since 1911, when the U.S. Supreme Court held in Grigsby v. Russell that a life insurance policy is personal property that can be assigned or sold. Every state regulates the life settlement market, and buyers are institutional investors — pension funds, hedge funds, and insurance companies.

Why Life Settlements Exist

Institutional investors want to purchase policies because they can calculate the actuarial value of the death benefit over a given life expectancy. What they’ll pay you depends on:

Your age — older policyholders typically receive higher offers
Your health status — a shorter life expectancy means a higher offer (the buyer realizes their return sooner)
The policy type — universal life and whole life policies are most commonly purchased
The face value — most buyers require a minimum death benefit of $100,000
The premium load — buyers factor in future premium costs until the policy matures

What You Could Receive

Life settlements typically pay 4 to 8 times the cash surrender value of the policy. For a policy with a $250,000 face value and a $15,000 surrender value, a life settlement offer might range from $30,000 to $75,000 — or sometimes more.

Example:

Policy face value: $500,000 universal life
Cash surrender value: $40,000
Life settlement offers received: $95,000–$140,000 (after competitive bidding process)

These aren’t hypothetical numbers — they’re representative of the types of offers our clients have received. Every situation is different, which is why we run a no-cost evaluation.

Who Is a Strong Candidate for a Life Settlement?

Age 65 or older (some programs start at 60)
Policy face value of $100,000 or more
Any type of permanent life insurance — whole life, universal life, variable universal life
Term policies with a conversion option (convert to permanent first, then sell)
Individuals whose health has changed since the policy was issued

If your policy is lapsing because you can no longer afford the premiums, a life settlement is almost certainly worth exploring before you let it lapse. A lapsed policy returns zero. A sold policy could return tens of thousands of dollars.

Tax Treatment of Life Settlements

Life settlements have a somewhat complex tax treatment:

Proceeds up to the policy’s cost basis (premiums paid minus dividends received) are tax-free
Proceeds above cost basis but up to the surrender value are taxed as ordinary income
Proceeds above the surrender value are taxed as capital gains

This should be factored into your decision, but for most clients the after-tax proceeds still far exceed the surrender value. We work through this with every client.

Option 4: Convert It — Exchange or Repurpose

Some policies can be converted or exchanged for a different financial instrument that better fits your retirement needs. The two most common strategies:

1035 Exchange to an Annuity

Under Section 1035 of the Internal Revenue Code, you can exchange a life insurance policy for an annuity tax-free — deferring any gain in the policy until you begin receiving annuity distributions.

This makes sense if:

You have a policy with substantial cash value
You’ve decided you no longer need the death benefit
You want guaranteed lifetime income instead
A direct surrender would trigger a significant taxable gain

A Fixed Index Annuity (FIA) is often the destination for these exchanges — it provides guaranteed income, protects principal from market loss, and can be structured with a spousal continuation rider. The 1035 exchange transfers the cash value without triggering taxes, which is a significant advantage over surrendering and then purchasing separately.

Conversion of Term to Permanent Life

Many term policies — especially those issued in the last 20 years — include a conversion option that allows you to convert to a permanent policy without a new medical exam or health questions. This is an extraordinarily valuable option if your health has changed since you bought the term policy.

Why this matters:

You convert the term policy to a universal life or whole life policy
That permanent policy is then eligible for a life settlement
The result: a term policy with no cash value becomes a permanent policy that can be sold for cash

This two-step strategy is worth exploring for anyone with a convertible term policy over $250,000 who is in their 60s or older and whose health has declined.

The Decision Framework: How to Think Through Your Options

Ask yourself these four questions:

1. Do I still need the death benefit? If yes: Keep the policy and make sure the premiums are sustainable. If no, proceed to question 2.

2. Is the policy permanent with a face value over $100,000? If yes: Get a life settlement evaluation before doing anything else. If no (pure term), ask: does it have a conversion option? If yes to conversion: Evaluate a convert-then-sell strategy.

3. Does the policy have significant cash value I’d like to keep working for me? If yes: Consider a 1035 exchange to an annuity rather than surrendering.

4. Am I paying premiums I can no longer comfortably afford? If yes: This is urgent — a lapsing policy returns zero. Explore a life settlement or paid-up option immediately.

Real Scenarios We See Regularly

The widow with a $500,000 whole life policy Her husband died two years ago. She’s 72, on Social Security, and paying $4,200/year in premiums for a policy that names her adult children as beneficiaries. The children don’t need the money urgently. The cash surrender value is $58,000.

Life settlement evaluation: $142,000 offer received.

She stopped paying premiums, received $142,000 in cash, and invested a portion in a fixed index annuity that now pays her an additional $800/month for life. Her children received the rest as an immediate gift.

The business owner with a key person policy He’s 67, selling his business, and has a $1,000,000 universal life policy that was owned by the company for key person coverage. He’s winding down the business and no longer needs the coverage. Cash surrender value: $85,000.

Life settlement evaluation: $210,000 offer received (competitive bid process, multiple buyers).

He used the proceeds as part of his business sale transition funding.

The healthy retiree with a convertible term policy She’s 64, healthy, and has a $400,000 20-year term policy expiring in 2 years. She didn’t realize the policy had a conversion option. Converting to a permanent policy before expiration preserves the ability to sell it — or to keep a smaller permanent policy for estate liquidity without medical underwriting.

What Legacy Wealth Services Does

We’re not a life settlement buyer — we’re independent advisors who help you understand all your options and, when a life settlement makes sense, help you access a competitive bidding process through our network of licensed buyers.

Free policy review: We evaluate your policy and give you an honest assessment of all four options.
Life settlement evaluation: We submit your policy for bids from multiple licensed buyers — you’re never limited to a single offer.
Conversion analysis: We help you understand whether your term policy has conversion value.
1035 exchange guidance: When an annuity exchange makes sense, we help you find the right product from our carrier portfolio.

There is no cost for the initial evaluation, and no obligation to proceed. If a life settlement doesn’t pencil out better than your alternatives, we’ll tell you.

Get a Free Policy Review

If you’re carrying a life insurance policy into retirement and you’re not sure whether to keep it, sell it, or convert it — that uncertainty is costing you either money or peace of mind.

Let’s look at your specific policy and give you a clear picture of your options.

Call Rodney Cummings: 503-832-8555 Or schedule your free policy review — we’ll look at the policy, run the numbers, and give you an honest recommendation.

Legacy Wealth Services — Oregon License #18847712 Serving clients throughout Oregon and beyond.

Note: Life settlements are regulated transactions. Tax implications vary by individual circumstance — consult your tax advisor regarding your specific situation. Legacy Wealth Services provides general financial guidance and connects clients with licensed life settlement providers.