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 paying your life insurance premiums or if you should cash in your life insurance policy. Selling your policy is an option to explore.
How Does Selling a Life Insurance Policy Work?
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)
Ways to Get Money From a Life Policy Before Death
There are a few ways to get money from your life insurance policy while you're still alive:
- 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.
- Accelerated death benefits offer the option to cash out or get money in special circumstances like a critical illness.
Depending on the type of life insurance policy you have, there may be several options to get money from your policy than a settlement.
5 Reasons to Sell a Life Insurance Policy
Before making a decision to take a life settlement, it's wise to get the help of a life settlement professional and involve your financial advisor and/or accountant. Here are some scenarios that may make selling your life insurance policy seem like a good idea:
- 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 need long-term care or if you experience an event that requires it
- 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 selling your policy may be an option for you.
These are general examples and each situation is different. If you are having difficulties or are ill, these decisions have serious implications. Make sure you get professional advice so that you do not make a decision you regret.
How Much Can You Get In a Life Insurance Settlement?
As the policyholder, you may be able to receive 10% to 35% of the amount that would be paid out when you die. It depends on a variety of factors though, including:
- The death benefit value of the policy
- Your age
- The cost and remaining time you'll pay premiums
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 to find a buyer on your own, it is recommended you work with professionals. Consider working with:
- A professional advisor
- A life settlement broker who can represent you, provide you with counsel, and search settlement providers for buyers on your behalf
- A life settlement provider
Once you have a potential buyer, you'll need to have the following information:
- The type of life insurance policy you have—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
Before You Sell Your Life Insurance Policy
There are some additional precautions to take before you sell your policy. First, request an in-force illustration or reprojection from your existing provider to understand your options if your situation has changed.
Then, make sure the people you are dealing with are licensed. Call your state insurance department to be sure. You should also 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, too. 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 also 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.
The Bottom Line
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.