Instead of letting your policy lapse at its expiration date, or quit paying the premium because you no longer can afford it, you have another option: sell your policy.
Why Would You Want To Sell Your Life Insurance Policy
Circumstances change – it’s a fact of life. Over time, you may find yourself in a position dramatically different than when you first took out your policy. Examples include:
- Your beneficiaries are now financially independent and no longer need to replace your income in the event of your death
- You’re recently divorced and no longer want to pay for a policy naming your ex-spouse as the beneficiary
- You can no longer afford the premium payments
- You have too much insurance. Your spouse has passed away and your children have grown so now you no longer need an insurance policy on yourself
What is Life Settlement?
The process of selling a life insurance policy is called Life Settlement. A life settlement is a financial transaction whereby a buyer, typically an investor, will payout cash in exchange for ownership of your policy.
Typically, the cash payout will be greater than the cash surrender value, but less than the policy’s stated death benefit.
The best candidates to sell are those who are 65 years old or greater or have a serious illness. This is because the shorter one’s life expectancy is, the greater the potential value of the policy is.
Investors also tend to look more favorable at policies with death benefits exceeding $100,000 because there are inherent transactional costs and risks with entering any type of investment transactions. The potential reward needs to be a high enough value to warrant entering into that transaction.
Finally, your policy needs to be a universal life or whole life policy. A term life policy may also be eligible so long as it has a rider that allows it to convert to a permanent policy.
Things To Consider Before Selling
1. Selling your insurance policy is a taxable event. At the time of this post, your gains are based on the cash proceeds of the settlement less the amount paid in premiums for the policy. As with all taxable transactions, several variables can benefit or harm your financial position, such as how the gain is taxed – whether as ordinary income or a long term gain. You should seek guidance from your tax attorney or CPA before selling your policy.
2. You will need to be willing to provide your medical records to a third party. Post sale, they will likely follow up on the status of your health. If privacy is a big concern for you, the process may feel invasive, so you’ll want to be prepared for that. It’s important to hire a trustworthy broker with a positive reputation in the industry.
3. You may not be eligible for future life insurance policies, Medicaid, or other government benefits if you enter into a life settlement. If this is a concern, talk with your financial advisor about some of the impacts of entering this process.
4. Not every policy is salable. Investors are looking for a return on their money. If you are young and healthy with 2 years left on your policy, it may not be worth as much as purchasing a policy for someone with a terminal illness.
How To Sell Your Life Insurance Policy
Selling your life insurance policy will involve working closely with your financial advisor. First, they’ll do an initial review to determine whether it’s worthwhile to proceed. They’ll also connect you with a broker who will assess your life expectancy.
You’ll complete an application which will be sent out to a group of life settlement providers who will analyze your policy and determine if it’s a worthwhile investment. If they wish to proceed they’ll provide an offer to buy out your policy.
A broker will present all offers to you and your advisor. If you decide to accept an offer, you’ll proceed to transfer the policy to the buyer, close the transaction and obtain your cash.
Are you planning to surrender your life insurance policy because you can’t afford the premiums, or no longer need the policy? A life insurance settlement may be an attractive option for you. If you’ve looked into a life settlement, share your experience in the comments below.