How to Sell Your Life Insurance
Most people purchase life insurance when they are looking for ways to protect their family's financial stability in the event of death. There may come a time when you wonder if it makes sense to continue to pay your life insurance premiums or if you want to cash in your life insurance policy. Life insurance settlements, or selling your life insurance policy, is a good option to explore. Here are some tips for selling a life insurance policy, with an overview of how selling a life insurance policy works.
How Does Selling a Life Insurance Policy Work?
The definition of selling a life insurance policy is when the policyholder sells the policy and associated death benefit to a third party in exchange for agreed-upon funds. The third-party buyer then takes over any premium payments and becomes the beneficiary of the death benefit.
When you sell your life insurance policy, you give up rights to that policy and any associated benefits.
Other terms for "selling a life insurance policy" include:
- Life settlement
- Viatical settlement (for those with a terminal illness or life expectancy under two years)
Options to Get Money From a Life Insurance Policy Before Death
Depending on the type of life insurance policy you have, there may be several options to get money from your policy besides the option of selling your policy for a life settlement.
- Borrowing from your life insurance policy may provide tax-free funds and still allow you to keep your life insurance policy.
- Cash Surrender of your life insurance policy allows you to cancel the coverage in exchange for any accumulated cash value from the policy.
- Find out about Accelerated Death Benefits. Some life insurance policies offer the option to cash out or get money in special circumstances like a critical illness.
5 Examples of Reasons to Sell a Life Insurance Policy
There are a few typical scenarios that may make selling your life insurance policy a good idea. However, before making a decision to take a life settlement, you should always get the help of a life settlement professional, and involve your financial advisor and/or accountant.
- If you are critically or chronically ill and your policy does not have an option to access the death benefit early, or the access to an early death benefit is less than what you could sell your policy for
- If you are in long-term care
- If you need to fund your retirement
- If you cannot afford to pay for your life insurance policy anymore and risk losing it
- If you no longer need life insurance. People need life insurance for many different reasons, and if you don't need life insurance anymore because you do not have any dependents to support, for example, then this may be an option for you.
These are general examples and each situation is different. If you are having difficulty or are ill, these decisions have serious implications, and making sure you get professional advice is always recommended so that you do not make a decision you regret.
How Much Money Can You Get From a Life Insurance Settlement?
According to a U.S. Government Accountability Office (GAO) study:
- The policyholder typically received four to eight times more than the cash surrender value of the policy.
- The payouts for life insurance settlements may be as low as 13 percent to 21 percent of the death benefit value.
Factors that determine how much you can sell your life insurance policy for include:
- The death benefit value of the policy
- Your age
- How much the premiums are on your policy and how long they have to be paid for
The amount of money the seller gets should be more than the cash surrender value of the policy and will be less than the death benefit value of the policy.
How to Sell a Life Insurance Policy
Selling life insurance is part of a regulated industry. Even though you could try and go out on your own and find a buyer, it is recommended to work with professionals to help you. Consider working with:
- A professional advisor
- A life settlement broker who can represent you, provide you with counsel, and will search settlement providers for buyers on your behalf
- A life settlement provider
Information You May Need
- The type of life insurance policy you have and the premiums. If you have term life insurance, you may also want to find out if you can convert it to a universal life or whole life policy.
- Personal information such as medical history and health information
- The cash surrender value of the policy
- How many years premiums will have to be paid for
Tips Before You Sell Your Life Insurance Policy
- Make sure the people you are dealing with are licensed. Call your state insurance department to be sure.
- Shop around to get the most value for your policy; if you don't feel comfortable with the deal, hold off until you get proper advice. The Life Insurance Settlement Organization is a good resource that may be able to help you.
- Look into the tax implications of the sale. Selling your life insurance policy may have financial implications, for example, having to pay capital gains.
- If the income from selling your policy changes your financial situation, it may affect your ability to qualify for government programs or subsidies, for example, Medicaid.
- Selling your life insurance policy may incur fees. Review offers from several buyers or life settlement brokers and compare what costs will be involved.
- If you are looking to take a settlement to finance something specific, beware that if you have debts, your debtors may be able to come after these funds. Make sure you understand how that could work.
Never agree to sell your life insurance policy if you are being pressured or are concerned with the decision or the advice you have been getting. Always get professional advice and if necessary a second opinion; there are many licensed professionals out there who will treat you fairly and can help you by providing information on your options.