What Happens To Your Life Insurance Policy When You Can’t Afford The Premiums Anymore?
Most seniors don’t realize they have five different options. Here’s each one, with real numbers.
You bought a universal life policy 20 years ago. The insurance illustration showed premiums around $12,000 a year. That felt manageable. Now the carrier is telling you it needs $25,000 or more to keep the policy in force, and you’re living on a fixed income that hasn’t grown at the same rate.
This is happening to millions of people right now. And most of them think they only have two choices: keep paying or walk away.
They’re wrong. There are five options, and some of them are worth a lot more than others.
Why premiums climb in the first place
If you own a universal life policy, your premiums were never truly “fixed.” The cost of insurance charges inside the policy increase every year as you age. When your policy was sold, the illustration probably assumed the cash value would grow at 6%, 7%, maybe 8% interest. Those rates haven’t materialized for most policyholders in over a decade. So the cash value that was supposed to help cover rising internal costs just isn’t there.
The result: the gap between what you’re paying and what the policy actually needs gets wider every year. Eventually the carrier sends a letter saying your policy is going to lapse unless you put in more money. A lot more.
You’re not alone in this. The National Council on Aging estimates that 80% of older adults are either financially struggling or at risk of economic insecurity in retirement. Absorbing a premium increase that doubles or triples what you were paying isn’t realistic for most people in that position.
Here’s the part that doesn’t get enough attention: somewhere between 85% and 88% of all life insurance policies never pay a death benefit. They’re surrendered, lapsed, or they expire. The insurance company keeps the reserves and moves on. So if you’re feeling like the system isn’t set up to help you here, you’re picking up on something real.
Your five options
Before you make any decision, you should know all five paths available to you. They’re listed here roughly from simplest to most financially valuable.
Reduce the death benefit
Call your insurance carrier and ask to lower the face value of your policy. A smaller death benefit means lower internal costs, which means lower premiums. You keep coverage in force, just at a reduced level.
This works well if you still want some coverage for final expenses or to leave something behind, but the original amount was more than you need at this stage. It’s a quick call to your carrier, and they’ll walk you through the new numbers.
Convert to reduced paid-up insurance
If your policy has accumulated cash value, you can use that balance to buy a smaller, fully paid-up permanent policy. Once the conversion is done, you never pay another premium. The tradeoff is that the new death benefit will be much smaller than the original.
This option makes the most sense when you want to stop writing checks entirely but still want your beneficiaries to receive something. Not every policy type allows this, so you’ll need to check with your carrier or agent.
Use accelerated death benefits
Many policies include a rider that lets you access part of the death benefit early if you’ve been diagnosed with a terminal or chronic illness. You don’t sell the policy or give it up. You just pull money out early, and the death benefit is reduced by the same amount.
This only applies if you have a qualifying health condition, but it’s worth checking. Long-term care costs have gone up nearly 69% since 2004, and the average semi-private nursing home room now runs about $94,900 per year. If you’re facing those kinds of expenses, this rider could provide real relief without giving up the policy entirely.
Surrender the policy
Cancel the policy and take the cash surrender value. This is what most people default to because it’s what their insurance company offers when they call to complain about premiums. The problem is that cash surrender values are usually a small fraction of the face value. On many universal life policies, we’re talking about 3% to 5% of the death benefit, and sometimes less if the policy has been underfunded for years.
There’s also a tax issue. Any gain above your total premiums paid is taxed as ordinary income. No capital gains treatment. And here’s something most policyholders don’t know: only 6 states (Washington, Wisconsin, Oregon, Maine, Kentucky, and New Hampshire) require insurance companies to tell you about the option we’re going to cover next before accepting your surrender. In the other 44 states, they can take your policy back without ever mentioning it.
Sell the policy through a life settlement
A life settlement is the sale of your life insurance policy to a licensed third party buyer, usually an institutional investor like a pension fund, hedge fund, or asset manager. They pay you a lump sum well above the cash surrender value. Then they take over the premium payments and eventually collect the death benefit.
This is legal in all 50 states, regulated in 43 of them, and has been established as legal property since a 1911 U.S. Supreme Court decision (Grigsby v. Russell). It’s not new. It’s just not widely known.
The numbers behind life settlements
According to the Life Insurance Settlement Association’s 2024 annual survey, sellers received an average of 6.5 times their cash surrender value. Typical payouts fall between 10% and 25% of face value for standard cases, with the overall industry average sitting around 20% of face value. For people with shorter life expectancies (under 2 years), payouts can reach 50% to 80%.
A 2013 London Business School study looked at over 9,000 policies with more than $24 billion in combined death benefits. Americans who sold their policies received more than four times what they would have gotten by surrendering to their insurance carriers.
And yet, only 2,699 policies were sold through life settlements in all of 2024. Over 500,000 policies that would have qualified were surrendered or lapsed instead. That gap exists almost entirely because people don’t know this is an option. A LISA survey found that 55% of seniors over 65 have never heard of a life settlement, and a separate Insurance Studies Institute study found 90% of those who let a policy lapse would have considered selling it if someone had told them.
Who qualifies?
Life settlements aren’t for everyone. You generally need to be 65 or older (strongest offers come at 70+), with a policy face value of $100,000 or more and a life expectancy under 15 years. Universal life, guaranteed universal life, indexed universal life, whole life, and convertible term policies can all qualify. Standard term policies without a conversion option typically don’t.
The process takes about 60 to 90 days from start to finish. A licensed broker gathers your medical records and policy documents, then submits the policy to a network of 10 to 20 or more institutional buyers. Those buyers compete against each other, which is what pushes the price up. Industry data from the first half of 2024 shows an average of 9 bids negotiated per closed policy, with closings spread across 12 different licensed providers. There’s no cost to the seller unless a sale actually closes.
A quick comparison
| Option | What you get | Best for |
|---|---|---|
| Reduce death benefit | Lower premiums, keep reduced coverage | Still need some coverage but can’t afford current level |
| Paid-up insurance | Smaller policy, zero future premiums | Want to stop paying but keep a death benefit |
| Accelerated death benefits | Early access to part of death benefit | Qualifying illness, need cash for medical or care costs |
| Surrender | Cash surrender value (often 3–5% of face value) | Small policies, no other options available |
| Life settlement | Avg. 6.5x cash surrender value | 65+, $100K+ face value, no longer need the coverage |
How to decide
Start by asking yourself two questions. Do you still need the death benefit? And if so, how much?
If the answer is yes, even partially, look at reducing the death benefit or converting to paid-up insurance first. Both let you keep some coverage without the premium burden.
If the answer is no, and you’re thinking about surrendering, stop and check whether your policy qualifies for a life settlement before you sign anything. The difference between a cash surrender and a life settlement payout can be tens or even hundreds of thousands of dollars. A life insurance policy that was worth holding onto for decades might still have real financial value, just not in the way you originally planned.
One more thing: don’t assume your financial advisor has already considered this. Nearly half of financial advisors say the main reason they don’t recommend life settlements is that they don’t know enough about them. If yours hasn’t brought it up, ask directly.
The bottom line
If your life insurance premiums have become unmanageable, the worst thing you can do is let the policy lapse without looking into every option. Surrendering or lapsing means you’re accepting whatever the insurance company decides your policy is worth, and it’s almost always the lowest number on the table.
There are 38 million life insurance policies held by Americans over 65, with a combined face value above $3 trillion. The secondary market for these policies exists, and it pays a lot more than surrender. The only barrier for most people is knowing it’s there.
Jeffrey Hallman is the Founder of Citizens Life Group and an Advisor at Asset Life Settlements, a licensed life settlement brokerage bound by fiduciary obligation to act in the seller’s best interest. I hold a Life Including Variable Annuity & Health license and a Viatical Settlement Broker license in the state of Florida. I founded Citizens Life Group after seeing how often seniors lose policy value because the information isn’t out there in plain language. I work with fiduciary-licensed brokers who are legally obligated to secure the highest offer for every client.
