Selling Your Life Insurance Policy? Here’s What You Need to Know

If you’ve thought about selling your life insurance policy for cash, you’re certainly not alone. This process, commonly referred to as a life settlement, attracts many policyholders for several reasons, such as financial hardship, shifts in life circumstances, or the realization that they no longer require coverage. However, prior to making this decision, it’s crucial to grasp the details of selling your term life insurance policy to ensure you make a well-informed choice.

The good news is…selling your life insurance policy for cash is a well-regulated process known as a life settlement. In this article, we will provide an overview of how life settlements work, explain how your policy’s value is determined, and outline key considerations to help you decide if selling your policy is the right move for you and your family.

Can you Sell Your Life Insurance Policy?

Absolutely, you can sell your life insurance policy through a process known as a life settlement or a viatical settlement. This option is particularly beneficial for addressing urgent needs like medical expenses and day-to-day living costs.

When pursuing a life settlement, you’re essentially transferring your life insurance policy to a third-party purchaser in exchange for a cash payout that exceeds the policy’s cash surrender value yet is less than its total face value.

A viatical settlement operates similarly, but it’s specifically intended for individuals who have been diagnosed with a chronic or terminal illness, allowing them to sell their policy under these unique circumstances.

Now that you know that you can sell your life insurance policy, it’s essential to understand the steps involved in the process and the factors that can affect both your decision and the outcome.

Types of Life Insurance Policies You Can Sell

Life insurance typically falls into two broad categories: term and permanent.

Term policies provide coverage for a specified number of years and expire once that term ends. In some cases, you may have the option for a return of premium or to convert your term policy into a permanent one upon its expiry.

Permanent life insurance is more intricate and encompasses various types. One of the most prevalent forms is whole life insurance, widely sold in the United States. However, options like universal life also exist, which includes subcategories such as indexed universal life.

Whole life insurance is straightforward and provides lifetime coverage as long as premiums are paid. It accumulates a cash value over time, though growth can be gradual. Many individuals opt for a whole life to ensure financial security for a spouse, cover funeral costs, or provide for their children.

In contrast, indexed universal life focuses primarily on cash value accumulation, with the life insurance component serving mainly to optimize tax advantages on cash inflows from the policy. (Read this article to find out more about leveraging indexed universal life for retirement funding).

Selling Term Life Insurance Policies

Ironically, selling a term life insurance policy can be more complex than selling a permanent one, primarily due to the specific conditions that potential buyers seek. First and foremost, buyers generally prefer policies with a conversion option. After all, it becomes a less favorable investment if they only stand to gain financially if you pass away during the term. In fact, only about 2% of term life insurance policies actually result in a payout.

Therefore, if you’re considering selling your term insurance, ensure that it includes a conversion option to either whole life or universal life insurance. Additionally, the remaining duration of your term policy plays a significant role in its marketability. The longer the term left, the more appealing it becomes for potential buyers, as this often translates into a higher cash offer.

Since term policies typically have lower premiums compared to permanent life insurance, buyers are generally attracted to those with substantial time left before they would need to start paying new premiums after conversion.

In some instances, buyers may exclusively target permanent policies, necessitating that you convert your term life insurance to a permanent type before pursuing a sale. Once you have completed that transition, the steps to sell your newly converted policy will align more closely with those involved in selling a permanent life insurance policy.

Selling Permanent Life Insurance Policies

Selling a permanent life insurance policy typically goes through a more robust valuation phase. Term policies don’t hold any cash value, and a newly converted term policy will hold little to no cash value. But permanent policies that someone has been paying premiums on for years can have built up quite a significant chunk of change.

The life settlement broker will look at the death benefit on your policy and the cash value, as well as your current premium obligations.

But beyond the additional valuation of the policy, selling permanent life insurance contracts is a whole lot easier than selling a term policy.

The Process of Selling Your Policy

Whether you’re contemplating selling your life insurance policy due to financial constraints or because you no longer require the coverage, the initial steps involve locating a potential buyer, ensuring you meet the necessary qualifications, and consulting with a licensed provider to explore your options.

1. Evaluate Your Policy

Before selling, carefully analyze your life insurance policy. Look at its coverage amount, type of policy (term, whole, universal), and the cash surrender value, if applicable ( We will all these factors in detail further in the article).

It is important to note that some policies may be more desirable in the resale market, particularly those with significant face values or that have been in force for a longer duration.

2. Choose a Trusted Life Insurance Broker or Life Settlement Provider

The easiest way to sell your life insurance policy is through experienced life settlement companies or life settlement brokers.

A life settlement company serves as an impartial intermediary between the policyholder and the buyer, creating a neutral marketplace that facilitates the transaction without favoring either side. They provide essential services, including:

– Policy valuation assessments
– Assistance in negotiating the sale
– Management of all related paperwork

These companies typically collaborate with a range of investors, enabling them to help you identify the best offer for your policy.

In contrast, life settlement brokers represent the policyholder directly and work to sell the policy on their behalf. They can evaluate your policy’s value and negotiate to secure the most advantageous deal. The key advantage here is that they solely represent your interests, as they do not act for the buyers or remain neutral.

Before you decide on any one, make sure that these companies/insurance agents specialize in life settlements and have a good track record. They should be licensed and follow state regulations. Researching reviews and seeking referrals can help you find trustworthy buyers.

Having a broker or settlement provider on your side can significantly enhance the selling process, ensuring you receive a fair evaluation and maximizing the financial return from your policy.

3. Provide Your Policy Information to the Life Settlement Provider

Once you find a life settlement broker or provider, you need to provide them with detailed information about your life insurance policy. This step is crucial as it forms the foundation for determining the potential value of your policy in the current market. This information can include things like type of policy, coverage amount, cash surrender value, health information, beneficiary designation, etc. You can begin this process by filling out the “What is your Life Insurance Policy Worth” form on this page.

4. Receive and Review an Offer

Once the life settlement provider has reviewed all relevant information and is ready to proceed, your dedicated representative will present the details of the offer, outlining the next steps in the process. You will have the option to either accept the full cash offer outright or consider alternatives, such as a Retained Death Benefit. This option allows you to receive a smaller cash payment while retaining a portion of your policy’s benefits, all without any future premium obligations.

5. Finalize the Closing Process

The closing process involves the formal transfer of ownership of the life insurance policy along with all necessary documentation. During this phase, your settlement payment will be held in escrow until the insurance company confirms the change of ownership. Once this verification is complete, the escrow agent will promptly release your settlement payment.

What is Your Life Insurance Policy Worth?

How Much Do You Get for Selling a Life Insurance Policy?

The amount you can receive from selling your life insurance policy varies widely depending on several factors. Here are the key elements that influence the value of your policy:

Policy Type and Benefits

The specific characteristics of your life insurance policy play a significant role in determining its value. Whole life insurance policies, for instance, often have higher cash surrender values than term policies. Moreover, if you have any riders, they may also affect the amount of cash you’re offered.

Cash Surrender Value

If you have permanent life insurance, the policy’s cash surrender value will have a big effect. This is the amount the life insurance company would give you if you surrendered your policy rather than sold it to a third party.

Typically, the higher the cash surrender value, the higher the offers will be if you choose the life settlement route.

Health Status & Life Expectancy

Your current health status is a crucial consideration. Life settlement companies will assess your life expectancy and overall health condition by requesting medical records and personal health information. Generally, the shorter your projected life expectancy, the higher the cash offer you can expect since buyers are willing to pay more for policies they anticipate will pay out sooner. Life Settlement candidates are usually 65 or older.

Death Benefit Amount

The death benefit, which is the amount of life insurance you purchased initially, is a critical factor in life settlement. When you sell your policy, the buyer will get the entire death benefit when you pass away. The higher the death benefit, the higher the amount of settlement.

Typically, companies won’t consider buying if the policy’s death benefit is under $100,000. If the death benefit is close to $100,000 and your health is bad, then selling it could be an option. Generally, the higher the death benefit, the better.

Premiums

The cost of the company maintaining your premiums when they become the policy owner will also affect their calculations of how much they’re willing to pay you for your policy. They, like you, want the highest amount of death benefit for the lowest premiums. So if, for example, you bought a whole life policy in your twenties that you’d held for 30 years before selling, you’ll likely get a very attractive offer.

General Economic Factors

You don’t have much control over this one. But life settlement prices change like everything else in investing. If many people are selling their life insurance, then demand may go down, and you’ll be offered less for your policy. Conversely, if people aren’t selling, you’ll get offered more.

What Are The Benefits of Using a Life Settlement Company or Broker

There’s another important option for selling an unwanted life insurance policy that deserves attention…. You can choose to surrender your policy back to the insurance company. In this case, they usually offer a very minimal portion of the cash value.

However, it’s beneficial to compare this choice with other alternatives, especially if you’re in good health or anticipate a long life ahead. Your insurance agent can assist you in evaluating these options, or you can reach out to us at (858) 703-6178 for guidance.

Life settlement companies and brokers have the ability to list your life insurance policy on an auction platform, allowing potential buyers to make their best offers. It’s important to note that you are not obligated to finalize the sale; if the bids don’t meet your expectations, you can always choose to retain your policy.

Independent life settlement brokers also provide financial advice, helping you navigate the best options for your family. They can assist in understanding the tax implications of selling your policy and address any questions that may arise throughout the process.

Think of a life settlement broker as a skilled real estate agent; they are well-versed in the intricate regulations and nuances associated with selling life insurance (just like selling a home), which isn’t something most individuals frequently do. They simplify the complexities of the transaction, allowing you to focus less on the sale and more on what matters most to you.

Why Would Someone Want to Sell Their Life Insurance Policy

There could be many reasons why someone might consider selling their life insurance policy. Understanding these motivations can help you evaluate whether this option is right for you.

Financial Needs

According to recent data from the Federal Reserve, 37% of Americans would struggle to cover an unexpected $400 expense. Even something as routine as a flat tire can create significant financial strain for a family.

When faced with the choice of charging the expense to a credit card or payday loan with exorbitant interest rates versus selling a life insurance policy, opting to sell may prove to be the more prudent financial decision. By selling the policy, individuals not only gain immediate cash but also eliminate the ongoing obligation of premium payments, which is far superior to allowing the policy to lapse and receiving nothing in return for years of contributions.

Change in Financial Priorities

Life circumstances often change, leading to a reassessment of financial priorities. For example, a former business owner might no longer require a large death benefit if their children are financially stable, or they might wish to redirect those funds into retirement savings or investments. Selling an unwanted policy allows individuals to reallocate their resources in ways that align with their new goals.

High Premium Payments

Other changes in the household’s cash flow can make maintaining premiums a challenge. Some policies, like most term or whole life, have locked-in premiums that always stay the same over the course of the policy. Other types of life insurance have premiums that change each year, making maintaining life insurance increasingly expensive as you age. If there’s a bottleneck in income, then selling your life insurance policy often works out better financially than letting the policy lapse due to expensive premiums.

Unnecessary Policy

Let’s say you purchased a life insurance policy to cover your mortgage. If your mortgage is paid off or nearly so, is there a reason to maintain that life insurance policy? Or perhaps your reason was a “just in case” policy to ensure there was enough money to send the kids to college. What happens when the kids graduate from college? It’s the same thing. There are many, many situations where a life insurance policy becomes redundant and no longer makes sense to maintain, again prompting the sale.

Terminal Illness Diagnosis

What happens if you suddenly have massive medical bills with a second-to-die policy? That can leave your spouse in a tricky position. A life settlement option can mean the difference between leaving medical bills behind or enjoying time with loved ones with as little stress as possible.

You Just Don’t Want It

Sometimes, it’s just better to have the lump sum cash. Getting out of debt sooner can make a world of difference. Other people want the opportunity to travel or just spend more time enjoying the retirement that they’ve always dreamed of.

Is It Legal to Sell A Life Insurance Policy?

In short, yes. The longer answer? Yes, if done right.

The life settlement process allows the person who owns the life insurance policy to sell it (a.k.a. transfer ownership of the policy) to an investor for a lump-sum payment.

But there are a lot of restrictions, too, on the investor side.

Most life insurance policies need to be active for a minimum of several years before they can be sold. Unlike a retail purchase where you can change your mind and return it within a year or list it online, life insurance policies generally come with just a 30-day “free look” period for returns. After that timeframe, the decision to sell is usually final.

You’ll also need to provide the broker with documentation of your insurability and life expectancy. Those affect the price that you’ll get for the policy. Typically, the healthier you are when you sell a life insurance policy, the less you’ll get.

Each state has an insurance board that regulates all life insurance sales and products in that state. Depending on the state in which you live, there may be different considerations for selling your life insurance.

Concerned about taxes from selling your life insurance? Talk to your financial advisor for help.

Ready to Sell Your Life Insurance Policy?

If you’re curious about how much cash you may get for life insurance coverage you no longer want or need, use the tool on this page to get a ballpark estimate. Remember, factors like medical records or a health condition will affect the value of the sale of a life insurance policy.

Feel free to contact us at (858) 703-6178; our team is readily available to answer any inquiries regarding life settlement transactions.