How to Sell Your Life Insurance Policy for Cash
Life insurance is an expensive and long-term commitment, and over time policyholders may find the premiums are too high or coverage is no longer needed. If your financial situation changes and you need a way out of your life insurance policy, you may be able to sell it through a transaction known as a life settlement or viatical settlement. However, there’s a few things you should know before you start the process. In this guide, we’ll help you determine if you should sell your life insurance policy and what the process looks like so you know what to expect.
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Can You Sell Your Life Insurance Policy?
You can sell your life insurance policy through a transaction known as a life settlement or a viatical settlement, but whether you should sell requires consideration of your financial situation and alternatives. You may find its better to reduce coverage or borrow against the cash value instead of selling.
If your only other options are surrendering the policy or letting it lapse, selling it will be a better choice. According to LISA’s 2023 Annual Market Data Collection Survey, selling a policy resulted in an average payout that was 622% higher than the cash surrender value. The amount you receive will be more than the cash surrender value, but less than the death benefit of the policy. Your right to sell your life insurance policy is legally protected by the Supreme Court case Grigsby v Russell in 1911, where the court ruled it was legal for a patient to sell his policy to his doctor in order to pay for care.
Reasons to Sell Your Life Insurance Policy
Most reasons to sell a life insurance policy come down to no longer needing coverage, being unable to afford the policy, or wanting to cash out. Here are the most common reasons for selling a life insurance policy:
- You can no longer afford the policy premiums
- Living expenses have increased, and you have less income or savings
- You need money to pay for a large, surprise expense
- You want to create a rainy day fund for medical bills and long-term care costs
- Your children are grown and financially independent
- Your policy term is about to end
- You sold your home and no longer have to worry about estate taxes
Selling your policy helps cut down expenses, and can give you money to help save or pay for other costs. In fact, you may be able to sell your policy for a value worth up to 60% of the death benefit or 6.2 times the cash surrender value.
How to Sell Your Life Insurance Policy
If you decide to sell your life insurance policy, you’ll want to start by speaking with a reputable life settlement company about your options, as well as a financial professional about any questions specific to your financial and tax situation. It may be a good idea to review your state’s life settlement regulations and taxation rules. You can only sell your policy once, so it’s worth taking your time to ensure you get the highest value.
Let’s walk through the basic steps of selling your life insurance policy through a life settlement:
1. Application
You’ll need to complete an application to sell your life insurance policy. In some cases, you’ll be asked to submit medical and insurance records. However, with your authorization, a broker can gather medical and policy documents on your behalf to make everything easier for you.
2. Underwriting
After submitting the proper documentation, your partner will begin the underwriting process which consists of thoroughly evaluating your information to verify its accuracy and check if you qualify for a life settlement. Typically, to qualify for a life settlement you’ll need to be at least 70 years old, have a death benefit of at least $100,000, and have a policy type that’s whole, convertible term, variable, or universal life.
3. Offer
4. Negotiation
After you’ve received your offer, you can choose to accept or reject the offer and negotiate for more money until a price is eventually agreed on. If you’re unsatisfied with an offer and the buyer doesn’t seem willing to budge, you can seek offers from other providers and repeat the process to see if you can get a better deal.
5. Exchange
Once you’ve accepted an offer, the buyer will send you closing documentation to complete. After you sign the documents, your life insurance company will be notified and they’ll transfer ownership of the policy to the buyer. During the transfer, you’ll also receive a one-time payment for the agreed amount, minus applicable taxes and fees.
How Much Can You Get From Selling Your Life Insurance Policy?
LISA’s 2023 Annual Market Data Collection Survey analyzed 3,218 policies that were sold in 2023 and found those transactions paid over$842 million to policyholders, an average sale price of $262,000 per policy (the largest value since LISA began collecting this data). The value from selling a policy was 6.2 times higher than the cash surrender value of those policies, and the survey found that selling a policy awarded $707 million more than what those consumers would have received from surrendering or lapsing their policy.
Factors that Affect How Much You Can Get From Selling Your Policy
The value of your life insurance policy is based on several factors. You can use our calculator to get a free estimate, but for additional context, here’s an explanation of the factors that affect policy values.
1. Policy Size
The death benefit is ultimately what the buyer is investing in when they purchase a policy, so a larger death benefit means a larger payout for them. Thus, larger policies typically result in higher offers.
2. Premium Costs
The buyer of a life insurance policy will need to continue paying premiums until the policyholder passes away. Thus, the cost of premiums is an important factor in policy valuation. Low premiums mean the policy is cheaper to maintain which results in a higher life settlement value. On the other hand, high premiums are more expensive and risky for the buyer which results in a lower offer.
3. Life Expectancy
Life expectancy is an estimate of how long the policyholder is expected to live, which is calculated by examining the age and health of the individual. In a life settlement the buyer will need to continue paying insurance premiums for as long as the policyholder lives, so a shorter life expectancy makes the policy more valuable because they expect to pay less in premiums over time.
4. Health Status
The health status of the insured is related to their life expectancy, as the presence of health conditions will reduce life expectancy and generally increase the value of a life settlement. On the other hand, healthy individuals may receive lower offers because they’re expected to live longer. When applying for life settlements, the company will ask about the presence of health conditions and how long you’ve had them for. They’ll also consider if any current health conditions were considered when purchasing the policy, which could reveal value if you developed conditions after purchasing the policy.
5. Age
Older individuals generally receive more money from selling their policy because they have a shorter life expectancy, while younger individuals can expect lower offers because the buyer has to account for paying premiums over a longer period of time.
6. Policy Type
The type of policy can have an impact on its sale value, as permanent policies with cash value may be worth more than term policies that are deemed riskier or sometimes ineligible for settlements.
Requirements For Selling Your Life Insurance Policy
Some people may be ineligible to sell their life insurance. In some cases, the issue could be that the person isn’t old enough which means they can reapply in a few years and may be approved. However, some factors like the policy type may mean a policy will never be eligible for a life settlement. The requirements to sell your life insurance policy include:
1. Type of Policy
Not all life insurance policies can be sold. To qualify for a life settlement, you must have a whole, convertible term, variable, or universal life policy.
2. Value of the Policy
In most cases, the face value of your policy must be at least $50,000 to qualify for a life settlement.
3. Age of the Policy Owner
People who have reached the age 70 years or older are most likely to qualify for a life settlement. The older the person is, the more valuable the life settlement becomes.
4. Age of the Policy
To sell your life insurance, you must own the policy for a set number of years regulated by the states. Each state has its own waiting period which varies between 2-5 years before you can sell it.
If you meet the above qualifications, you will likely be able to sell your policy to a third party buyer. However, even if you don’t meet the qualifications above — you may qualify for a viatical settlement if you were recently diagnosed with a chronic or terminal illness. If you need help determining your eligibility, contact us today to find out if you qualify and how much your policy is worth. We will guide you step-by-step through the process, answering all of your questions and can give your a free estimate of the value of your policy if you are interested.
Selling a Term Life Insurance Policy
Term life insurance policies may be sold through a life settlement, but it usually needs to be converted into a permanent policy like whole, universal, or variable life insurance. You’ll need to contact your insurer to discuss if you can convert your policy and what the process entails. Your insurer may set a conversion deadline that only allows a term policy to be converted within the first 5-10 years of coverage, and some insurers also set age limits that prevent you from converting a policy if you’re 65 years old or older. Once a term policy has been converted, you can check its eligibility to sell the policy through a life settlement.
If you’ve been diagnosed with a terminal or chronic illness, it may be possible to sell your term policy without converting through a viatical settlement.
Selling a Whole, Universal, or Variable Life Insurance Policy
If you have a whole, universal, or variable insurance — you may be able to sell it through a life or viatical settlement. These are permanent life insurance policies that build cash value, and they’re more likely to be eligible for a settlement than term policies because they don’t need to be converted first. The cash value of your policy will be a factor in its eligibility for a life settlement and the value you can get from selling it. If you do sell it, you’ll get a payout that’s more than the cash surrender value, but less than the death benefit and the money you get is generally tax-free outside of returns you get from the cash value.
Frequently Asked Questions About Selling Your Life Insurance
How Long Does It Take To Sell a Life Insurance Policy?
The process varies from case to case and can take anywhere from two to four months depending on how long it takes to acquire the proper policyholder documents, the level of interest among buyers, and the length of negotiations between the buyer and seller.
Where Can I Sell My Life Insurance Policy?
Life insurance policies can be sold to providers or brokers. You can choose to sell through a broker, but be aware that many brokers charge up to a 30% commission on the sale price of the policy. Many providers have broad networks of institutional investors with different investment preferences. Because of this, providers can find the right buyer for your policy to give you a fast, fair settlement.
Can I Back Out If I Change My Mind?
You have the option to back out at any point during the life settlement process and have no responsibility to accept an offer unless you find it suitable. There’s also a rescission period that’s typically two weeks and allows you to back out of the deal after accepting an offer.
How Are Life Settlements Taxed?
The profit you receive from a life settlement is taxable, meaning you’ll have to pay taxes if you received more from a life settlement than you’ve paid in premiums over the policy’s life. The difference between the surrender value and premiums paid is taxed as regular income, and the remaining proceeds are taxed as long-term capital gains. The taxation rules for life settlements can be complex so it’s best to consult a financial advisor to see if you’ll have to pay anything and how much that would be.
Are There Rules on How You Can Spend the Money From Selling?
You can spend the money you receive from selling your life insurance policy any way you’d like. Many people use the money they receive to pay off debt, fund retirement living expenses including vacations, or set up an emergency fund for future medical expenses. The proceeds you get from a life settlement can help provide financial stability in your golden years, so we recommend at least getting an estimate so you have an idea of how much your policy is worth — even if you don’t plan on selling for several years.
What Are the Alternatives to Selling Your Life Insurance?
Selling your life insurance policy isn’t always the best option, and eligibility requirements may prevent some people from qualifying for a life settlement. If your policy is too expensive, here are some alternatives to consider:
Downsize the policy
You may be able to make your policy more affordable by reducing the death benefit, removing extra riders, or bundling your life insurance with other forms of insurance like home and auto. Additionally, some insurers provide discounts for participating in wellness programs and you may be able to lower premiums by making positive lifestyle changes since insurers consider your health when setting insurance rates. Changes like exercising more often, eating healthier, and stopping the use of tobacco products can lower insurance premiums.
Replace the policy
You can replace your life insurance policy with an entirely different one that’s cheaper and offers different benefits better suited to your current needs. When switching your policy, you might want to check out different insurers or consider switching to another policy type. For example, replacing your term policy with a whole life policy to build cash value.
Pay for premiums with cash value
Life insurance policies that build cash value allow you to use that money to subsidize or even pay for premiums after reaching a threshold. Using cash value will lower the death benefit, but it may be better than paying out of pocket to cover insurance premiums.
Borrow Against Your Policy
If you want to maintain your policy but need money for other expenses, you may be able to borrow money from the cash value of your policy. The amount you can borrow depends on your insurer, and you’ll be charged interest for the loan. If you haven’t repaid this loan when you pass away, the remaining balance will be subtracted from your death benefit.
Utilize an Accelerated Death Benefit
An accelerated death benefit (ADB) is a rider included in most insurance policies that lets the policyholder receive a portion of their death benefit in advance if needed. Eligibility for an ADB depends on your insurer, but typically this option is used for individuals diagnosed with a terminal illness.
Surrrender Your Policy
If you no longer want or need coverage, you can surrender your policy to your insurer for a cash sum. However, this option isn’t recommended because a life settlement produces a far higher return.
Let Your Policy Lapse
Letting your policy lapse is technically an option, but isn’t recommended because you receive absolutely nothing for your policy. Instead of letting it lapse, you’re much better off surrendering your policy for a small cash sum or selling it through a life settlement for a larger amount. Even if you have a term policy, you may be able to convert it into a permanent type which would be eligible for a life settlement.
Should You Sell Your Life Insurance Policy?
Only you can decide whether selling your life insurance policy is the best option for your needs and financial goals. Even if you don’t plan on selling, we recommend getting a valuation so you can compare it to other choices or keep it as a consideration for the future.
Harbor Life Settlements Can Help You Sell Your Life Insurance Policy
If you’ve decided to sell your life insurance policy, Harbor Life Settlements can help you maximize the value for your policy. We offer over 100 years of experience in the industry, expert service, and technology that’s changing the life settlement market. We can quickly put your policy in front of our wide network of institutional investors to get you a fast, fair settlement. If you’re interested in finding out how much your policy is worth, you can use our life settlement calculator below, which is AI-powered and analyzes millions of data points to instantly provide an estimate that’s up to 89.2% accurate.
