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Life insurance is a way to provide for your loved ones when you're gone or build up a cash reserve you can pull from if necessary. But if your beneficiaries don't need the payout and you could use some extra cash, you may wonder if selling your policy might be a smart decision.
Selling your life insurance policy may be a good idea in some cases, such as if you need the money or if the reasons for paying the premiums no longer exist. Still, it's not something to rush into without serious consideration. Here's what you need to know.
Can You Sell Your Life Insurance Policy?
You can sell your life insurance policy in what's called a life settlement. Businesses that buy life insurance policies are called life settlement companies, and some will buy any type of policy, whether it's a permanent life or term life policy.
When you sell your life insurance policy, a life settlement company pays you money—and then continues to pay the premiums you were paying.
Upon your death, whoever owns your life insurance policy receives payout instead of your original beneficiaries. If it works as it should, it's a win-win scenario for the seller, who makes some money on a life insurance policy they no longer need or no longer can afford to pay the premiums on, and the buyer who eventually receives the payout.
Of course, if you decide that you can't afford to pay the premiums or simply no longer want your life insurance coverage, you could also simply stop making the payments. If you have whole life insurance, you could also contact your insurer and tell them you'd like to cancel the policy and take what is called the cash surrender value.
How Much Can You Get for a Life Insurance Policy?
The cash surrender value can vary but is often 30% to 50% of the premiums you've already paid the life insurer. Life settlement companies often advertise policyholders selling life insurance policies for two to four times the amount of the cash surrender value, but that seems unlikely to be representative for most people, says Michel Léonard, chief economist and data scientist at the Insurance Information Institute, an insurance industry association.
It may be worth starting with your insurer, however, and seeing what the cash surrender value is, Léonard suggests. "One also has to think that in most cases, selling back a policy to the carrier is not only more transparent, but also less fraught with potential problems," Léonard says, pointing out that the interaction between the insured policyholder and the carrier is heavily regulated. Most states do have laws about selling your life insurance policy, but in several states, there is no such oversight.
"Typically, it is complex to determine if it makes sense to sell a policy, but oftentimes a policyholder has no options," says Mitchell Franklin, associate professor of accounting in the Madden School of Business at Le Moyne College.
Franklin says that the settlement industry has a poor reputation, and that selling a life insurance policy is not an ideal scenario. But he also concedes that you are probably going to be better off selling rather than taking a cash surrender value. "If the option is to sell the policy or let it lapse," he says, "it is better to sell it and take the cash than let it lapse."
How to Qualify for a Life Settlement
Life settlement companies, sometimes referred to as senior settlement companies, all have their own individual rules, and states regulate life insurance settlements differently. But generally, the qualifications fall under the following:
- Minimum age requirement: Companies typically require policy sellers to be 65 or older. Some companies also place a maximum life expectancy, such as 20 years, for a policyholder to qualify. In some cases, you can be under 65 years of age to sell, though you'll need to have a significant health issue, such as terminal illness or a chronic one. These types of life insurance policy sales are called viatical settlements.
- Minimum death benefit: The policy's death benefit needs to be at least $100,000.
- Age of policy: You'll need to have held your life insurance policy for at least two years.
- Policy premium: Your annual premium will usually need to be less than 5% of the policy's face value.
How to Sell Your Life Insurance Policy
It can take two or three months to sell a life insurance policy and usually involves the following steps:
- Contact a broker or settlement provider. You'll want to contact a reputable life settlement insurance broker or several reputable life settlement providers. One of the best ways to find one is to contact your state's department of insurance; they will likely be able to give you a list of licensed life and viatical settlement providers. The upside of working with brokers is that they can shop around for you and get the best price for your life insurance policy—but brokers are paid a commission, which may come out of the money you receive. If you prefer to contact providers directly, be sure to get multiple offers to find the best deal.
- Fill out an application. All of the information you'll furnish is about one thing, and one thing only: "This is about determining the value of a life policy," Léonard says. He says that you'll likely be required to share the life insurance policy itself as well as provide medical information and possibly some financial information.
- Your offer is accepted—or not. The life settlement company's underwriters will decide how much your life insurance policy is actually worth and the company may or may not make you an offer. You can then accept that offer—or not. If you didn't get an offer, your broker may keep searching for a new buyer. The broker might also try to negotiate for more money. If you accept the offer, you'll be sent documents to sign, and your insurance company will be contacted. Your beneficiary will now be the life settlement firm, and you will receive your money.
Is It a Good Idea to Sell My Life Insurance Policy?
Whether it's a good idea to sell your life insurance policy depends on a number of factors. For instance, you may genuinely no longer need the life insurance policy. Maybe you bought your life insurance policy years ago, and now you're a widower without children. Or perhaps you have children but they're wealthy, while you could use the money from a sale.
If family members could use the life insurance payout when you someday pass on, then the question of whether it's a good idea to sell your life insurance policy may be more complicated.
If you're not sure if a sale is right for you, consider the pros and cons first. There are a number of upsides and downsides to selling a life insurance policy.
Benefits of Selling Your Life Insurance Policy
- The money: If you feel your life insurance policy has outlived its usefulness, you may be reluctant to cancel it after paying so much into it. By selling the policy, you'll at least earn some of that money back.
- No more premiums: Not only will you receive money for selling your policy, you'll save cash by no longer making monthly premium payments.
- Less stress, more options: You may improve your quality of life during your retirement years by having additional revenue from the life insurance sale.
Downsides of Selling Your Life Insurance Policy
- No future payout: If you have beneficiaries who were going to benefit from your life insurance policy, you may come to regret selling your life insurance policy. (If you do regret it, in some states, within a certain time frame, you're allowed to return the money and any premiums a buyer made and get your policy back.)
- More taxes to pay: If you end up making more money than you paid in premiums, you'll pay taxes on your profits. For instance, if you paid $30,000 in life insurance premiums over the years, and you sell your policy for $50,000, you'll pay taxes on $20,000 of that income.
- Debt collectors could come calling: Do you owe money? Creditors might be able to claim the money you receive from selling your life insurance.
- Benefits could be threatened: Are you receiving government benefits such as SNAP benefits or Medicaid? You'll want to make sure that you won't lose those benefits if you receive money from a life insurance settlement sale.
- Privacy risks: Your life insurance policy could change hands over the years, being sold and resold, and along with the transactions, your medical information will likely be shared with each investor.
The Bottom Line
Whether selling your life insurance policy is a good or bad decision depends on your individual financial circumstances and whether your beneficiaries will suffer financially without the proceeds from your policy.
Research selling life settlements or viatical settlements and discuss the matter with any professionals you work with and trust, such as a financial advisor or attorney—and only work with reputable brokers and companies that you feel you've vetted. If you've paid a lot of money into your life insurance policy and plan to sell, you deserve to get every dollar you can for it.