Most people purchase life insurance when they are looking for ways to protect their loved ones with financial stability in the event of their death. But these are long-term contracts, and over time, any number of things could change. There may come a time when you no longer need the policy, or when you need the money more. You may wonder if it makes sense to keep paying your premiums each month instead of using those funds for other things in your budget; or perhaps you need to funds something bigger and want to cash in your policy for the full value.
No matter the reason, if you're thinking of selling your life insurance policy, you have options. Make sure you know how the process works, what's at stake, and how to make choices that you won't regret down the line.
How Does Selling a Life Insurance Policy Work?
Just like when you first bought your life insurance policy, when you decide to sell it you enter into a legal contract. You agree to sell the full deal to a third party, and the death benefit that comes with it, in exchange for funds that you both agree to. To be clear, when you sell your policy, you give up all the rights and future payouts that came with it. Once the deal is complete, the buyer then takes over any premium payments and becomes the beneficiary of the death benefit. Former names are erased.
There are a few other terms for this process, so when you sell your policy you may hear it called a "life settlement" or a "viatical settlement." The latter occurs when the seller has a terminal illness or a life expectancy under two years.
Ways to Get Money From a Life Policy Before Death
If you don't wish to sell your policy to a third party buyer, there are a few ways to get money from it while you're still alive:
- You can borrow from your policy; this will still allow you to keep your former coverage intact, may provide tax-free funds in a time of need. If you pay the loan back by the terms of the deal, you may not owe any tax on these funds at all.
- You can do a cash surrender; this is when you give up the policy in full, which allows you to cancel the coverage in exchange for any built up cash value that you have paid into it thus far.
- You can take accelerate death benefits, which offers the option to cash out fully, or get money in special circumstances like a critical illness.
Depending on the type of life insurance policy you have, there may be many ways to get money from its value, other than a full settlement.
Five Reasons to Sell Your Life Insurance Policy
Before you decide to take a settlement, it's wise to get the help of an expert in this field, and perhaps involve your financial advisor and/or accountant. Here are some cases in which selling your life insurance policy might be a good idea:
- If you have a chronic illness, or if you become terminally ill, and your policy does not have an option to access the death benefit early; or if the access to an early death benefit is less than the cash value or what you could sell your policy for
- If you need long-term care or if something happens that changes your forecast for long term care
- If you have not saved enough money to retire and you need the cash funds
- If you cannot afford to pay for your policy on a monthly basis and risk losing it
- If you no longer need life insurance, such as if you do not have any children or other people to support, or no one that you wish to name as a beneficiary
These are general examples and each situation is unique. If you are having health trouble or have become gravely ill and you don't have a plan in place to protect your loved ones, losing life insurance can have drastic effects. Make sure you are aware of the outcome of each option fully before taking any action, and get professional advice if you need help. It's worth the extra work or cost up front if it means you can avoid making a choice you might regret.
How Much Can You Get In a Life Insurance Settlement?
As the policyholder, you can expect to receive about 20% to 25% of the amount that would be paid out when you die, though this figure will vary. The exact amount you'll receive in cash back when you settle depends on a wide range of factors, such as:
- The death benefit value of the policy
- Your age
- The cost and amount of time that remains to pay premiums
Many companies will have limits in place before they'll even think about making a deal. For instance, some restrict the process to people over the age of 65. You'll be asked to apply through a formal process before they approve you outright. Then they'll use the factors listed above (and maybe more) to land on a price that still makes them a profit. 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
As you might imagine, selling life insurance to a third party is part of a highly regulated industry, and therefore it can be a very complex process. Even though you could try to find a buyer on your own, the safest and most efficient way is to work with professionals in the field. These may include:
- A professional advisor
- A life settlement broker who can provide you with counsel, and search for buyers on your behalf
- A life settlement provider
Make sure the people you are dealing with are licensed. You can call your state insurance department to check their background. This simple step may help avoid fraud or other issues.
Once you have a buyer, you'll need to have the following information ready:
- 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 your health and medical history, and any other facts that may speak to the value of your policy
- 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 extra precautions to take before you sell your policy. First, request an in-force illustration or reprojection from your current provider. This is a formal document that uses the current status of your policy (cash value, benefit amount, and any loan balance) to project its future value. Having this knowledge will help you gauge how much it might be worth to someone who wants to invest in it. It can also help you weigh your options if something on your end has changed.
You should also shop around to get the best price; if you don't feel good about the deal, and think you may be able to secure a better offer, hold off until you get proper advice. The Life Insurance Settlement Organization (LISA) is a non-profit resource that may be able to help you.
Look into how the sale might affect your taxes too. For instance, selling your life insurance policy may cause you to have to pay capital gains. If the money you get from selling your policy changes your income bracket, it may affect your ability to qualify for government programs or subsidies, such as 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 in order to finance something specific, beware that if you have debts, your creditor may be able to come after these funds. This will take priority over anything you have planned to use the funds for on your own. Make sure you're aware of all the ways that could work.
Never agree to sell your life insurance policy if you are being pressured, or if you don't trust the advice you have been given, or if you suspect any foul play at all. Though most people in the field will treat you fairly and give good advice, there is still a chance for fraud or coercion when this type of sale occurs.