You may have heard that selling a life insurance policy is a good way to get cash for your retirement, medical bills, or long-term care expenses. It may seem like a relatively easy way to get the cash you need quickly, but this is not always the case.
The truth is that selling a life insurance policy might be a viable alternative in some specific situations, and even then it is a complex decision that should not be taken lightly.
If you are thinking about selling your life insurance policy, you first need to understand how it works, who can help you, and what the consequences are. You should be sure that you cannot continue to pay for your life insurance policy, or that you no longer have a need to provide for your beneficiaries when you die.
Before you decide to sell a life insurance policy for cash, carefully examine all of your options, be aware of the pitfalls, and make sure that it is a good decision for your specific circumstances.
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What Does It Mean to Sell a Life Insurance Policy?
Selling a life insurance policy involves selling the policy to another entity or investor. That buyer becomes the owner of the policy, pays the premiums, and receives the death benefit when you die.
This process is also referred to as a life insurance settlement or a viatical settlement. It may allow you to receive more money than if you cancelled or surrendered the policy for its cash value, but less than the face value—or death benefit—of the policy.
Before you evaluate the pros and cons of a life insurance settlement, first consider that a third party will own insurance on your life, with the purpose of profiting when you die. If you accept that concept, then consider how the process works and decide if it is right for you.
How Does Selling a Life Insurance Policy Work?
In order to sell a life insurance policy, you must find a buyer. You can do this on your own or use a life settlement broker to find offers to purchase your policy.
You will likely be required to provide insurance policy documents and your medical records to the potential buyer (settlement provider). Settlement providers make offers to purchase life insurance policies based on a variety of factors, most importantly:
- Your age and health
- The type of policy you have
- The cash surrender value (accumulated cash value) of the policy
- Amount of premiums
What’s in it for the settlement provider? The buyer pays you the agreed-upon sum for the policy, and then takes over the premium payments or resells the policy to another entity that pays the premiums.
When you die, the owner of the policy receives the death benefit. Because the amount you were paid for the policy is less than the death benefit, and premium payments continue, the buyer profits.
Policies on older or terminally ill people that have higher face value are worth more to settlement companies because the opportunity for profit is greater.
When Is Selling a Life Insurance Policy a Good Idea?
Some people are better candidates for selling a life insurance policy than others. Having a universal life insurance policy or any policy with a face value over $250,000 makes your policy more attractive to settlement providers, and you are more likely to receive an acceptable offer. But whether your policy is attractive to buyers is not the only consideration.
Selling a life insurance policy may be a good option for individuals over 65 years old who are chronically or terminally ill. It may also be an acceptable option if your life circumstances have changed and you no longer have dependents who will need financial support after your death.
If you simply can no longer afford to pay your policy premiums, selling your life insurance policy is one of many options. Your best bet is to thoroughly examine your options with the help of an accountant, insurance agent, or financial advisor, and make sure it is the best option for you.
Remember, if you decide that selling a life insurance policy is a good idea for you, the influx of cash you will receive is only a fraction of the face value of the policy and the amount that your beneficiaries would receive upon your death.
According to the U.S. Government Accountability Office, payouts for life insurance settlements are often as low as 13% to 21% of the face value of the policy.
Buyer Beware: Pitfalls of Selling a Life Insurance Policy
If you can afford to keep paying your premiums and you still have a spouse or dependents, you might be better off keeping your life insurance policy and seeking alternatives for your retirement or medical bills. The death benefit of your policy will always be more than what you will receive if you sell it. And be aware of these other pitfalls:
- Tax consequences. You may have to pay income and capital gains taxes. Be sure to talk to an accountant before making your decision.
- Eligibility for benefits. The cash gain from selling your policy may prohibit you from qualifying for Medicaid or other government benefits that you need.
- Privacy concerns. You will likely be required to share personal medical information in order to sell your life insurance policy. And settlement providers may frequently check up on your health status. Be sure to work with a trustworthy broker and settlement provider if you want to protect your privacy.
- Roadblocks to other coverage. If you sell your policy when you are older or have health problems, purchasing other life insurance coverage may be cost-prohibitive or impossible.
- High-pressure tactics. Be sure you work with a trustworthy broker who is licensed with your state insurance department. Don’t fall prey to high-pressure sales tactics or a broker or provider who wants you to make a fast decision. If you can, work with the agent who sold you the policy, or ask your agent or financial advisor for a referral to a reputable settlement broker.
How do you know if you are getting a fair price? You could be selling yourself short by selling your policy. If the death benefit is significantly higher than what you are being offered, it might be best to hold on to the policy unless you absolutely need the funds and can no longer pay the premiums.
And be sure to pay attention to the fees being charged. You may have to surrender up to 30% of the proceeds to fees for the broker or other entities involved in the transaction.
If you do decide that selling a life insurance policy for cash is the right option for you, be sure to do your homework and shop around for the best offer. Don’t take the first offer you get, and remember that a higher selling price could actually bring you less cash if the fees are greater.
What Are Some Alternatives to Selling a Life Insurance Policy?
Life insurance settlement providers and brokers tout the practice as an acceptable estate planning tool. But in reality, it is often a last-resort option that is only applicable in certain situations. You probably have a variety of other options to consider before you decide to sell your life insurance policy.
- Borrow money from a cash-value life insurance policy. This is a tax-free option, and your life insurance policy stays in force.
- If you are terminally ill, find out if your term or permanent life insurance policy has an endorsement that allows you to access your death benefit early. This is a tax-free option that allows you to use your policy for expenses. Just remember that the death benefit will be reduced by the amount that you take from the policy early.
How to Learn More About Selling a Life Insurance Policy
Selling your life insurance policy is an important and complex decision that shouldn’t be made on your own. Talk with your insurance agent, financial advisor, and family, and above all, make an informed decision.
If you decide to sell your policy, make sure you understand the life insurance settlement regulations in your state. In most states, you will have 30 to 60 days to change your mind, return your settlement, and reinstate your policy.
For questions about life insurance and selling an existing policy, contact a local agent.