Can You Sell Your Life Insurance Policy?
Just like any other item that you own, a life insurance policy has value and can be sold.
You may be interested in selling your policy for several different reasons. For example, you may no longer have a beneficiary who needs it, so you would prefer to cash in now. Or you may not be able to afford the premiums for the policy anymore.
Typically, you sell your policy in exchange for an immediate lump sum of cash. The buyer of the policy then becomes the new beneficiary, meaning they will receive the death benefit of the policy when you die.
For this reason, whatever payout you are offered will likely be much lower than the death benefit, so the buyer can make a profit. Companies that buy life insurance policies typically must be licensed, and you should always check to make sure you are dealing with a legitimate organization.
How Much Can You Get if You Sell Your Life Insurance Policy?
The amount of money you will get for selling a life insurance policy depends on your specific circumstances. There are several factors that play a role.
The size of the policy will naturally have a large say in this. The larger the value of the policy, the more money you may be able to receive.
Your age works similarly. The older you are, the more money you are likely to receive since the company would not have to wait as long for you to die and collect the death benefit.
For these reasons, you may find it difficult or even impossible to sell a policy if you are young or if your policy does not have much value.
What Types of Life Insurance Are You Able To Sell?
Generally, most types of life insurance policies can be sold if there is a death benefit that the company can benefit from.
This includes both term life and whole life policies. You can sell less common types of policies as well.
What Is a Life Settlement?
A life settlement is a cash payment in exchange for selling your life insurance policy. Selling a life insurance policy can be a financial solution to help alleviate debt or maintain a higher quality of life. A policyholder can sell their life insurance contract to a third-party buyer if there is no longer a need for the policy, no beneficiaries, or the policy premium becomes too expensive to pay for.
You must meet certain criteria to qualify for a life settlement. Such qualifications include:
- Being over the age of 65
- Having an active policy for at least two years
- Having a life insurance policy with a minimum death benefit of $100,000
The higher the face value of your policy, the more appealing it will be to potential buyers.
Viatical Settlements vs Life Settlements
There are many reasons policyholders may choose to sell their life insurance policies. One of the most common includes preparing for death when diagnosed with a terminal illness. While life settlements are typically given to candidates 65 years or older, terminally ill candidates have access to a second option: viatical settlements.
A viatical settlement, similar to a life settlement, is also a financial solution that policyholders can use to help pay for medical expenses and treatment. However, monetary disbursement can be given to someone of any age who is terminally ill. The intent of this settlement is to leave families with as little debt as possible after the policyholder’s death, though policyholders can use the settlement money however they choose.
Viatical settlements can help ensure families are left with little to no debt from health expenses, hospice care and ongoing medical treatment.
Though life settlements can also help alleviate debt, policyholders can use the disbursed lump sum however they choose. Typical life settlements provide more flexibility and are meant for individuals with an extended life expectancy. Be sure to consider your options when pursuing a payout for a life insurance policy.
Read More: Life Settlement FAQs
How Do I Find Out the Cash Value of My Life Insurance Policy?
To find out the cash value of your life insurance policy, you will likely have to reach out to the company that issues your policy. Cash values will vary heavily depending on your specific circumstances and the size and value of your policy.
The cash value is what you would receive if you opted to surrender your policy to the company that issued it. Remember that this is different from selling a policy.
When you sell a life insurance policy, you are involving a third party, which purchases the policy in order to become the beneficiary of the death benefit.
Surrendering the policy involves only you and the company that issued it.
For this reason, the offer you receive to sell your policy will likely fall somewhere between the surrender value and the death benefit.
If the cash value of your policy is more than you have been offered to sell the policy, then it would make the most sense to just surrender the policy to the insurance company.
Do I Have to Pay Taxes if I Sell My Life Insurance Policy?
Whether you have to pay taxes on your life insurance policy will depend on how you sell your policy, as well as some other personal factors.
For example, you will likely not have to pay any taxes in a viatical settlement. But this option is only available to you if you are terminally ill.
If you were to sell your life insurance policy in a life settlement, then you would likely have to pay taxes on it.
This can confuse people since the death benefit paid out for a policy is generally not taxable. But the lump sum from the sale of a policy is not always taxed the same way.
The way you are taxed can also vary. You may not owe tax on the entire lump sum payment that you received, but instead, on the amount of your payout that goes above what you paid into the policy in premiums.
For example, if you received a $50,000 payout for selling your policy but had paid $30,000 in premiums over the years, then you would only owe taxes on the additional $20,000.
What Are the Pros and Cons of Selling Your Life Insurance Policy?
There are both benefits and downsides to selling a life insurance policy.
Perhaps the biggest and most obvious pro of selling the policy is access to immediate cash. When you sell your policy, in a life or viatical settlement, you will receive an immediate lump-sum payment.
This cash can typically be used for anything you see fit. For those who participate in viatical settlements, it is often used to pay medical bills or expenses.
Another benefit is no longer having to pay the premiums on your policy. Not being able to afford premiums is one of the main reasons people look to sell their policies.
Selling your life insurance gives you a way to no longer pay premiums while also getting money for the policy.
But there are serious drawbacks to selling your policy as well. When you sell, you and your beneficiaries give up the right to the death benefit. This means that when you die, the company that bought your policy is paid the death benefit.
Another major con is that you are settling for less money than what the policy is truly worth by selling it. Companies buy life insurance policies to make a profit. This means, your payout will never equal what could have been paid out to your beneficiaries if you had kept the policy.
How To Sell Your Life Insurance Policy
Prior to pursuing a life settlement, policyholders should consider consulting an experienced life settlement broker or a life settlement provider.
While both are thoroughly experienced in selling life insurance policies, brokers and providers are different. Providers purchase life settlements, and policyholders can sell their policies directly to them. Brokers can solicit bids on your policy to help you get the highest sale price.
Financial professionals play an important role in protecting their clients’ assets and providing reliable financial options for selling life insurance policies.
When you find a broker or provider to handle your life insurance policy, they will take the next steps to sell your policy.
5 Steps Brokers or Providers Take To Sell Your Policy
- They will acquire your medical records to help calculate your life expectancy. The shorter your life expectancy, the lower the number of premium charges they will have to pay, and the shorter amount of time they will have to wait to collect the death benefit.
- You will complete an application to sell your life insurance policy and send it to competing providers or your broker to solicit an offer.
- Brokers will then bid your policy for potential buyers to help provide you with the highest sale price. If you receive an offer, you have the option to sell your policy.
- You will receive a closing package requesting the transfer of ownership for the life insurance policy. Once the package is returned and all the appropriate documents are signed and approved, the buyer assumes responsibility of the policy and will begin making payments on the premium.
- Every so often, buyers will check in to confirm your living status. After your death, the buyer will be able to receive the full death benefit from the insurance policy.