Sell Your Life Insurance Policy
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How Selling a Life Insurance Policy Works
To sell your life insurance policy, contact a licensed life settlement company. They will provide an offer based on your age, health, and policy. If you sell, you will receive a cash payment that is larger than the cash surrender value but less than the death benefit. The buyer takes over the premiums and receives the death benefit when you pass away.
Overall, the process typically takes around 3 to 4 months to sell a policy, but some experienced companies can put money in your pocket in as little as a week.
That is the condensed version of how selling a policy works. To learn more, read this guide on the life settlement transaction process.
Can I Sell My Life Insurance Policy?
Yes, it is possible to sell your life insurance policy for cash in a transaction called a life settlement. People 65 or older can typically sell their life insurance policy as long as the face value of the policy exceeds $200,000.
Universal life insurance policies and other permanent policies (like whole life) make the best candidates for life settlements, but a wide variety of policy types and values are eligible.
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Can I Sell My Term Life Insurance Policy for Cash?
Yes, you can sell a term life insurance policy for cash as long as the policy is convertible into permanent life insurance.
To understand why it can be difficult to sell a term life policy, it is vital to understand the difference between a term and permanent policy.
A term life policy lasts for a certain period of time. If you pass away within that time period, your beneficiary receives a death benefit. If you outlive the term, the policy ends at the end of the term.
Permanent life insurance does not have a set term, meaning the policy is in effect for the remainder of the policyholder’s life (as long as the policy is paid up or they continue making payments).
When you purchase a term policy, you often have the option to add a conversion rider. A conversion rider makes a term life policy convertible to a permanent life policy.
A term policy has to be converted to a permanent policy to be sold.
The good news is that, if you have a convertible policy, your health will not have to be re-evaluated when you convert to permanent life insurance.
The bad news is that some conversion riders have age or time limits on when a conversion can happen.
You will need to look at your policy or call your insurance agent to find out if your policy is convertible and what limits it has on conversion.
Am I Eligible?
Now that you know that both permanent and term policies can be sold, it is important to note that there are certain eligibility requirements. If you don’t meet these requirements, it is unlikely that a settlement provider will be willing to purchase your policy.
The most important life settlement eligibility factors are:
- Age/Health: Most people that ultimately sell their policies are 65+ years old or have a serious medical condition.
- Policy Type: Universal, whole, and convertible term policies are all great candidates for a life settlement.
- Policy Size: The existing policy should have at least $200,000 in face value.
In summary, to be eligible to sell your life insurance policy, it is best to be over 65 years of age or have a serious medical condition and own a permanent (or convertible) life insurance policy that has a face value of at least $200,000.
Why Do People Sell Their Policies?
Most people sell their life insurance policies because receiving cash while they’re alive is more important to them than leaving a death benefit for a beneficiary. Reasons for needing cash range from paying for long-term care to enjoying retirement to the fullest.
Here are some of the most common reasons why people sell their life insurance policies.
1. You No Longer Have A Beneficiary
Perhaps you took out your policy when you still had dependents that would face financial hardship without your income.
If you have since retired, or your beneficiaries are financially dependent, they may no longer need the death benefit from your policy.
2. You Are Overinsured
If you have more than one policy on yourself or both you and your spouse have high dollar policies, you may no longer need one of them.
This is especially so if you have more insurance than you have beneficiaries that will need to replace your income when you’re gone.
3. You Can No Longer Afford The Policy Premiums
If you can no longer afford an expensive policy, selling your policy is a great way to get some spending cash while also eliminating future premium payments.
Talk with a professional to see what options are open to you.
4. Your Term Policy Is Approaching Expiration
When a term life policy is about to end, you have some decisions to make. You generally have to take action at least six months before the term ends.
If you have a conversion rider, you can convert the policy to permanent insurance and sell it.
Don’t let your term policy expire without considering the choices available to you.
5. You Need Cash Now More Than Your Beneficiary Needs Cash Later
If your beneficiaries are financially stable and you aren’t, consider selling your policy.
Unanticipated costs crop up as we age. You may need money for long-term care, medical bills, or to bolster your retirement income.
If your needs in life outweigh the death benefit that a non-dependent beneficiary would receive, selling your policy could be the right choice.
Opting to sell your life insurance should be a well thought out move. It is always best to consult with a professional to ensure that you know what your best options are.
How Much Money Can I Get?
The amount of money you will receive from a life settlement payout depends on the size of the death benefit, the cost of the premiums, and the life expectancy of the insured.
Life settlement providers look at these factors to determine how much it will cost to keep the policy active (known as the in-force illustration) and how much they will receive when the seller passes away.
Providers use a mathematical model to figure out the amount they can pay the policyholder and still receive a sufficient return from purchasing the policy.
Let’s walk through each one of these factors to see how they influence a policy’s valuation.
Size of the Death Benefit
The larger the death benefit, the larger your payout will be. This is because the purchaser will receive the death benefit when you pass away, so they’re willing to pay more for it.
Cost of the Premiums
When you sell your policy, the purchaser continues to make all premium payments. So, if your premiums are relatively low compared to your death benefit, your payout will be more substantial.
Life Expectancy of the Policyholder
It is a morbid thought, but policies are worth more to life settlement companies if the policyholder has a short life expectancy. The reason for this is because if the policyholder passes away sooner, the purchaser will have to make fewer premium payments before receiving the death benefit.
To estimate a policyholders life expectancy, life settlement providers collect medical records through HIPAA release forms. With medical records, they can perform a medical underwriting to estimate the life expectancy of the policy owner.
The policy owner has to give the provider permission to obtain the necessary information to create life expectancy projections.
The best way to estimate your policy’s cash potential is to use our life insurance settlement calculator.
Pros And Cons of Selling Your Life Insurance Policy
When deciding if selling your life insurance policy is the right course of action, it is imperative to review the pros and cons.
|The immediate lump sum payment you receive for a life settlement is larger than the surrender value of your policy.|
|When you sell your policy, you no longer have to make premium payments.|
|You can use the money you are no longer spending on premiums and the money you make in the settlement to pay for medical or long-term care costs.|
|You will also have more money to enjoy your retirement.|
|Your beneficiaries will not receive anything upon your death.|
|You may become ineligible for Medicaid. However, if you have a permanent life insurance policy, you may already be ineligible for Medicaid. Medicaid recipients cannot have more than $2000 in assets. The cash value of a permanent life insurance policy counts as an asset.|
|While the majority of proceeds are tax-free, portions of your life settlement proceeds may be taxed.|
Alternatives to Selling Your Life Insurance Policy
There are several alternatives to selling your life insurance policy, the most common are:
- Taking advantage of a policy’s accelerated death benefit.
- Borrowing against a policy’s cash value.
- Stopping payments to receive the policy’s surrender value.
Below, we’ve outlined those alternatives in more detail. It is important to note that while all of these are viable options, selling your life insurance policy will put more cash directly into your pocket.
Accelerated Death Benefit
An accelerated death benefit (ADB) refers to a rider that can be added to a policy that allows the policyholder to receive a portion of the death benefit while they are still alive. The ADB is sometimes referred to as a “living benefit.”
Borrow Against Life Insurance
If you still want your policy but need cash now, you can borrow against your life insurance policy. In this sort of transaction, you are borrowing a portion of your policy’s cash value with the expectation that you will pay it back.
As with all loans, you will be charged interest (which is often also taken from the policy’s cash value).
Any outstanding amount at the time of your passing is subtracted from the death benefit paid out by the policy.
When you surrender your life insurance, you stop paying your premiums and tell the insurance company that you no longer want or need life insurance coverage. After you surrender your policy, you’ll receive a portion of the cash surrender value of the policy.
As we mentioned above, the surrender value is almost always lower than the amount received in a life settlement.
How To Sell A Life Insurance Policy
Once you have assessed the pros, cons, and alternatives of selling your policy, you may decide that selling your life policy is your best course of action.
To get started, contact a life settlement broker or provider. There is a difference between these two types of buyers.
Life Settlement Brokers
A life settlement broker is a licensed professional whose role is to represent you, the policyholder, in a life settlement purchase. The broker will negotiate on your behalf and protect your interests during the process of selling your policy.
Brokers must be licensed in the state where you live.
In exchange for representing you, the broker takes a commission that is typically 10% or more of the negotiated settlement payout.
Life Settlement Providers
A life settlement provider is a company that buys life insurance policies. This is normally done on the secondary market. They may be purchasing policies for their company or for institutional investors.
It is important to note that a life settlement provider is acting in their own interest. They have no fiduciary responsibility to consider your best interests; but, most insurance companies have representatives with a fiduciary responsibility who will act on your behalf.