What happens when you sell your life insurance policy

What happens when you sell your life insurance policy

Table of Contents

How To Sell A Life Insurance Policy

There’s a good chance you’ve heard of selling your life insurance as a source of extra income. If you’re in need of cash for medical expenses, hoping to use some extra income for starting a business or looking to fund your retirement years you may want to consider this option, especially if you no longer need the policy. 

However, the idea of selling life insurance probably brings up some interesting questions. Can I sell my life insurance policy? Can I take money out of my life insurance? How do I sell my life insurance? These are valuable considerations, and in this article we’ll give you the answers you need to make the best decision. 

What Is Life Insurance Cash Value?

There are several kinds of life insurance policies, but not all have cash value. It’s important to pay attention to what type you have if you’re looking to sell. 

First, with  term life insurance you pay for a specific amount of coverage for a fixed term. You can usually renew these policies when they expire, and while the death benefit remains the same, as you get older the  premium amounts will increase with each renewal. A term policy does not have any cash value.  

Just as it sounds,  whole life insurance is designed to last your entire lifetime.  A portion of the premium paid each month builds cash value and most policies participate in interest or dividends.   Policy owners can take a loan from the cash value relatively easily.  

Similarly, with  universal life insurance, a portion of your premium each month may accumulate in account value.  Over time the amount may grow large enough to allow for a loan.   Loans from account values do not necessarily need to be paid back; the amount of the loan would be deducted from any death benefits paid.  

So, In each of these last two policy types, there may be the opportunity to borrow cash from the policy.   If you were to surrender the policy, it is this account value that would be returned to you, less any surrender charges, when terminating the policy.  

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

How Life Settlements Work  

Selling your life insurance policy for cash can be a good way to supplement your income. If you’re getting older and your kids are grown up and independent, you may no longer need the insurance protection.  In this case, you may want to consider the cash benefit from selling a life insurance policy. 

Additional funds can be handy for simply supplementing your retirement funding, extra expenses, medical treatments, or even a special vacation.   

A life settlement is the sale of a life insurance policy to a third party in exchange for a lump sum of cash today. 

In exchange for the cash payment, the seller will no longer be responsible for premiums and will no longer receive any death benefit from the policy.  

It’s a relatively simple process to get the money you need through selling your life insurance policy.  Working with a licensed byer, you will be asked to provide information about both the policy and the insured.  Both the policy and insured will go through underwriting.

  For the policy, the specific features and future costs will be considered.  For the insured, medical records will be collected and reviewed.  The two aspects of underwriting are combined to determine a value for the policy.   

Any offer extended to purchase the policy will always be an amount higher than the  surrender value of the policy.  If you accept an offer, the seller will receive a purchase and sale agreement from the buyer.

  Additional information will be collected for a diligence process.  The buyer will set aside purchase funds into an escrow account.  Change of ownership and beneficiary will be processed at the life insurance company.  Once complete, the seller will receive the sale proceeds. 

The entire process lasts a few weeks, and much of that time can be waiting for the life insurance company to process information or ownership change requests. 

How To Sell A Life Insurance Policy

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

Who Qualifies For a Life Settlement? 

A life settlement typically provides the highest cash return, but not every insured or every policy qualifies.  Life settlements are designed for seniors, ages 65 and older with life insurance policy benefits of $100,000 and higher.  With the  average age of an insured is 78, younger insureds generally need to have had some health changes relative to the policy’s original underwriting.  Often those looking to sell a policy are doing so as a more lucrative alternative to simply lapsing or surrendering an unneeded or unaffordable policy.  

A viatical settlement is available to individuals who suffer from terminal or life-limiting chronic illnesses.  There is no minimum age for a viatical settlement, but generally the $100,000 minimum death benefit remains.  Most commonly individuals seeking a viatical settlement are looking for funds for specific needs such as paying for medical treatments or paying down debts.  

In both of these cases, if offered you may consider a retained death benefit life settlement.  In this transaction, instead of receiving a lump sum of cash, the seller retains a portion of the death benefit with no additional premiums.  Other than the type of proceeds, cash or future death benefits, the process is the same.  

What is the Value of my Policy?

In general, you may receive in cash  anywhere from 10% to 35% of the life insurance policy death benefit  when you sell it.  The value of the policy will be determined through underwriting, as discussed earlier.   Here is a bit more detail on what influences value.  

 

For the policy, buyers consider the life insurance company, most requiring at least an A rated company, the  specific life insurance product, the amount of cash value in the policy and ongoing premium requirements.  Some policy contracts have conversion features, some guarantees.  Policies have maturity dates ranging from insured age 95 to age 120 or more.  All of these policy features will be considered.  

On the insured side of the equation the most important factors are age and health status.  Medical records will be reviewed by an underwriter and using actuarial tables the health status of the insured will be determined, similar to when the policy was issued. 

 

At its most basic level, the value of the policy is the present value of the death benefit.  Buyers will take into account the future benefit and the amount of premium payments estimated to be paid to determine a value and to make a purchase offer.  

Once an offer is made, it is your choice how to proceed by either accepting or declining that offer.  One additional item to keep in mind, like selling any financial asset, the proceeds of your sale may be taxable.  The IRS has specific guidelines for life settlement and viatical settlement taxation, and it is best to check with your tax advisor.  But generally, the amount of premium paid into the policy is considered your cost basis and amounts above considered ordinary income or capital gains.

Selling Your Life Insurance Policy

A life settlement should always be an option to look into if you meet the general qualification of 65 years old or older with a life insurance policy benefit of $100,000 or more and you are considering discontinuing your coverage through a lapse or surrender.   If you want to know more, get in touch with a professional who can help you determine your eligibility and help you understand what options available to you.  

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