How Do Life Insurance Buyouts Work?

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Most people buy a life insurance policy because they want to ensure that their loved ones and family members can have financial security after they pass away. Life insurance is a sensible and prudent choice for most individuals, since it can ensure that your dependents are taken care of in the event that anything happens to you. Since life can be so uncertain, most people buy their life insurance policy quite early in their adult life. But as time passes, you might feel that your life insurance premium payments to your insurance company are no longer worth it.

So what are you supposed to do in this situation? You can surrender your policy, but the cash surrender value of the policy may not amount to much. Therefore, a life insurance policy

buyout or a life settlement can be the better option for you. If your loved ones are financially independent and you no longer want to maintain your life insurance policy, then you have the option of selling your policy for a cash payout. The process where a policyholder sells their life insurance policy for a lump sum payment, or payments in increments, is called a life insurance buyout.

Eligibility for a Life Insurance Buyout/Settlement Option

Before you can choose a life insurance buyout, there are certain criteria you as a policy owner must meet:

  • The face value of your life insurance policy needs to be $100,000 or more. If the value of your policy is low, then it will not be considered a good investment by most potential buyers.

  • You need a permanent life insurance policy such as a whole life policy or universal life policy in order to be eligible for a life insurance buyout. If you have a term life insurance policy, you can talk to your insurance agent and convert it to a permanent one before you sell it. 

  • Most life settlement companies or life settlement brokers will consider individuals who are above the age of 65. If you have been diagnosed with a terminal illness or a chronic illness, you can opt for a tax-free

    viatical settlement instead.

If you qualify for one of the standard conditions, then the potential buyers of your life insurance policy will want to go through your medical records before they buy your policy. If you want to sell your policy to pay the medical bills of a terminal illness, then your insurance might sell faster. The shorter the life expectancy of the policyholder is, the higher the chances of a life insurance buyout.

Is Life Settlement the Right Option?

A life insurance buyout is an important financial decision, and there are certain things you should consider before you decide whether  it is the best option for you:

  • Your loved ones and beneficiaries are financially independent – If your dependents have attained financial independence, it would make sense for you to keep paying your premiums since they will no longer need your policy’s death benefits.

  • You need cash flow – Whether you need the cash for your business, or to pay off a debt, a life insurance buyout can help you infuse your business with capital or pay off your mortgage/car loan.

  • You don’t want to keep making the life insurance premium payments – Life insurance premium payments can have a high cost. It makes sense to keep paying the premiums if your beneficiaries no longer need your death benefits.

After considering your circumstances, and talking to a financial advisor – if you decide that your dependents no longer need your death benefits, then you can consider a life insurance buyout. A buyout can help you with receive a lump sum payment or payment in installments, and you no longer need to keep paying premiums.

Who Buys the Life Insurance Policy?

If you are a policy owner who wants to sell their life insurance policy, you have a few options when it comes to your potential buyers. The usual process of a life insurance policy

buyout is handled by a life settlement company or a life settlement provider. You may also take the help of a broker who can arrange the sale for you, or find a private buyer yourself.

Every option has its own advantages and disadvantages. Selling the policy on your own could mean paying no commission to a broker, but a broker can get you a larger payout than what you might get on your own. Either way, you get to decide what the best option for you is. 

Selling your policy means that you are no longer responsible for it. You receive a cash payout, and your buyer will take over paying your premiums to your life insurance company. Once you sell your policy, your beneficiaries can no longer receive your death benefits. The buyer who ends up purchasing your life insurance policy will receive your death benefits once you pass away. Usually, life insurance policies are purchased by investors who want to diversify their funds. Once sold, your policy becomes a financial asset for an investor. 

The Life Insurance Buyout Process

The life insurance policy buyout process is a fairly simple one, but you will need to understand how it works so that you are aware of the potential implications. You may want to speak to an insurance agent, financial planner, life settlement advisor, or a tax advisor before you decide to sell your policy. The sale of your policy is an important financial decision, and the life settlement you receive may count towards capital gains and have tax implications, so you need to know how the sale can affect your cash payout. 

After considering all the implications, if you want to proceed with the sale of your life insurance policy, then you will need to follow certain standard steps:

  • Arrange the necessary paperwork –  The life settlement company or the life settlement provider you choose will want to look at your life insurance policy and your medical records. You will need to fill out a form with your basic information, and you may also have to sign a medical release form so that the life settlement company can access your medical information.

  • Allow the life settlement company to review your application – Once you have finished providing the life settlement company with all the relevant information, they will review it and decide if they want to purchase your life insurance policy. If there is a buyer for your policy, then you will receive an offer. You are free to accept this offer or reject it.

  • Decide if you want to accept their offer – If you decide to accept the offer for your policy, then the life settlement company will put together a final package. All the involved parties will need to sign documents. Then, the cash payout will be transferred to you and your life insurance policy will be transferred to the buyer. If you have opted for the services of a broker, then they will charge a commission that will come out of the funds you receive. 

The amount of money you receive in your life insurance settlement will depend on several factors:

  • Policy’s death benefits – the higher the death benefits of your life insurance policy, the larger the payout will be. 

  • Insurance premium payments – if your insurance premium payments are on the lower side, then you may receive a higher payout, since the buyer has to assume responsibility for your premium payments. 

  • The insured’s life expectancy – if the policyholder has a low life expectancy because of a serious illness or a terminal illness, then they will receive a larger amount of money in their payout.

The Life Insurance Buyout Process – How Long does it Take?

The process of life insurance buyout can last anywhere from 6-10 weeks, depending on a number of variables. The time it will take to sell your policy will be unique to your particular situation – but it may take more time or even less.  

Since there are several things that need to be verified by the life settlement company before the sale, the whole process can take a while. Not only do they have to look at the cash value of your policy, but they will also be verifying information regarding your identity and your medical history. After considering these aspects, they will make you an offer. 

After you accept the offer, it can take a while for you to receive your funds. The life settlement advisor may be able to give you a timeline for when you might receive your funds. 

Other Options

If you want a cash payout for your life insurance policy, then a life insurance buyout is not your only option. There are alternatives to a life insurance settlement, such as:

  • Surrendering the policy – if you no longer want to pay your insurance premium, you can surrender your life insurance policy for cash value.

  • Accelerated death benefits – When a policy owner gets diagnosed with a terminal illness or a chronic illness, they can receive a portion of their policy’s death benefits early.

  • Loan against the cash value – You can take out a loan against the cash value of your life insurance  policy. The loan will be subjected to an interest rate.

While there are viable alternatives to a life insurance buyout, selling your life insurance policy will yield the highest payout among all your options, and you no longer need to keep up with your insurance premium payments. 

The Key Takeaway

As the policyholder, it is up to you to decide if a life insurance buyout is the right option for you. Selling your policy will have certain financial implications – your beneficiaries will no longer receive the policy’s death benefits and the payout you receive may be subject to taxes. Once you understand all the consequences of selling your policy, you can then make an informed choice for you and your loved ones.

Don’t lose your lifelong investment. Discover your policy’s value today.


Will selling my life insurance policy cost money?

No, it will not have any upfront costs. That said, you will not receive the face value of your insurance policy in the payout, and if you have used a broker, then they will charge a commission.

Are there any restrictions regarding how I spend the payout?

No. The proceeds from a life settlement can be used in any manner you see fit. You may use it for medical bills, paying off your mortgage, or even invest it into your business.

Do I have to use the services of a broker?

No, you can sell your life insurance policy on your own. But using a broker may get you a higher payout.

Can I only sell my policy if I am terminally ill?

No. You can sell your life insurance policy for a traditional life settlement as long as you are over the age of 65, and own a permanent life insurance policy. If you are terminally ill, you may opt for a viatical settlement.

Don’t lose your lifelong investment. Discover your policy’s value today.