As you get older and your situation changes, you may decide that your life insurance policy is no longer necessary. Maybe it’s because your loved ones are financially independent, or maybe it’s because your rates have increased and made the policy unaffordable to maintain.
In either situation, you’re left with a decision on what to do with your life insurance policy. Selling your life insurance policy can be a good idea for some people, as it generally offers a higher return than surrendering the policy. However, it’s a decision with major implications so you need to know what you’re getting into. In this guide, we’ll cover the essential information to help you decide if you should sell your life insurance policy.
Considerations before selling your life insurance policy
To determine if you should sell your policy, there are a few things to consider. Knowing this information will ensure you have a clear understanding of the process and if it’s the best decision for your needs.
1. Can you sell your policy?
You can sell your life insurance through a transaction known as a life settlement, also referred to as a life insurance buyout. Businesses or third-party investors known as life settlement providers will buy your policy and pay you a lump sum of cash. After the transaction, they’ll continue paying your premiums and collect the death benefit when you pass away.
Whether you can sell your policy or not is based on if you meet the right eligibility criteria. Generally, you need to be at least 70 years old, have a policy with a value of at least $50,000, owned the policy for at least two years, and have an eligible type of policy (whole, variable, universal, or convertible term) to qualify for a life settlement. Viatical settlements are a similar transaction to life settlements, but have different requirements to sell a policy. The main difference between a life and viatical settlement is that qualifying for a viatical settlement means you need to have a chronic or terminal illness, though there is no age requirement for a viatical settlement.
2. How much is your policy worth?
After establishing you can sell your policy, the next question is how much it’s worth. You can use our life settlement calculator for a free estimate that’s up to 89.2% accurate, or get an idea by knowing the factors that influence the policy’s sale value:
- Policy Value: The larger your death benefit or face value, the more your policy is worth to buyers since that’s what they’ll collect.
- Age: The general rule is that the older you are, the more your policy is worth. That’s because older individuals have a shorter lifespan, which means the life settlement company expects to pay fewer premiums and collect sooner.
- Health Status: Health conditions reduce your life expectancy, which increases your policy’s offer for the same reasons above.
- Premium Costs: Low premiums mean a higher offer, since it means the life settlement company pays less to keep to policy active.
- Selling vs. Surrendering: Selling to a life settlement company will generally get you more than you’d get by surrendering to the insurer, 5x as much on average according to LISA.
3. Tax implications of selling your policy
You may have to pay taxes on the payout you get from selling your life insurance policy, as the proceeds can be taxed as income or capital gains. Life settlement taxes are based on the profit you get from the transaction, meaning the difference between what you’ve paid in premiums and the payment you receive from the buyer. So you you’ve paid $100,000 in premiums over the life of the policy and sell it for $150,000 — you’d have to pay taxes on the $50,000 difference. Viatical settlements are generally not taxable.
4. Impact on beneficiaries
Since the main reason for life insurance is generally to provide for beneficiaries, it’s important to consider how selling the policy will impact them. Most notably, they won’t receive the death benefit when you pass away. Consider whether this would cause financial strain for them, or if they’ll be financially fine without the death benefit. Of course, you can always leave them the remaining balance of your settlement proceeds along with other assets.
Another consideration regarding beneficiaries, is if cashing out your policy while you’re alive would alleviate the need to ask for money to cover retirement expenses. For example, would selling your policy allow you to pay for a nursing home on your own instead of asking beneficiaries for financial support? If your beneficiaries are financially independent, selling may have less of an impact on them.
5. Alternatives to selling your policy
The last and arguably most important consideration, is how does selling your policy compare to alternative options:
- Reduce Coverage: If you wish to maintain life insurance coverage but want to lower premiums, you can work with the insurer to adjust your existing coverage or shop for a new, smaller policy that’s more affordable.
- Policy Loan: You may be able to borrow money through a loan against the cash value of your policy, and most insurers will lend up to 90% of the cash value.
- Surrender for Cash Value: If you have a form of permanent insurance, you can surrender it to the insurer for the cash surrender value, though surrendering pays much less than selling it.
- Lapse the Policy: You can simply stop paying the policy if it’s no longer affordable, though this is not recommended because you’ll receive nothing in return. It’s worth seeing if you can get any money through other options.
- Accelerated Death Benefit: A accelerated death benefit (ADB) is a rider in some insurance policies that allows you to collect a portion of the death benefit in advance if you need it. Each insurer has eligibility criteria, and it’s typically used for people diagnosed with a terminal illness who need money to pay for care.
Should you sell your life insurance policy?
There’s no clear-cut answer when it comes to whether you should sell your policy or not, you need to consider your needs. You should start by deciding if you need a life insurance policy or not. If you need coverage, then it’s best to look into alternative options like borrowing from your policy to pay premiums or getting a cheaper policy. If you don’t need coverage, then you can compare selling your policy to lapsing it or surrendering it for the cash value.
Pros of selling your life insurance policy
- Cash Payout Now: The main benefit of selling your policy is that you get a cash payout, allowing you to recoup some of the money you’ve put in. You also get to use this money while you’re alive, which can increase your quality of life in retirement.
- Use Proceeds for Anything: There are no rules on how you can spend the money from selling your policy. Use it to pay off debt, cover retirement expenses, go on vacations more often, create an emergency fund, or anything you want to do with the money.
- Avoid Premiums: In addition to getting money, you’ll also save on expenses by no longer having to pay life insurance premiums, which can get significantly more expensive as you get older.
- More Money than Lapsing or Surrendering: On average, the payout from selling your policy is 5x more than the cash surrender value. It’s also better than getting nothing by lapsing coverage.
Cons of selling your life insurance policy
- No Death Benefit for Beneficiaries: Beneficiaries won’t get a death benefit, though you can leave them the remaining balance of your settlement as inheritance.
- Taxes on Settlement Proceeds: You may need to pay taxes on any profits you get from selling the policy.
- Potential Ineligibility for Future Life Insurance Policies: Selling a life insurance policy may prevent you from getting another policy later in life, so think about if your needs may change.
How to sell your life insurance policy
If you’ve decided to sell your policy, here’s how you can start the process and what to expect from beginning to end:
- Application: The submission of medical records and life insurance policy documents to life settlement providers
- Underwriting: The evaluation of your medical records and policy details to determine eligibility for a settlement and its value
- Offer: The purchase offer presented by life settlement providers, which you can accept or reject
- Negotiation: The negotiation of the offer (if not accepted), until a sale amount is agreed upon
- Exchange: The exchange of ownership for the policy, where the buyer becomes the new owner and sends you a lump cash sum
If you’re interested in selling your whole or term life insurance policy, use our life settlement calculator or contact us to get an estimate and start the process. We’ll answer all of your questions and help you determine if you should sell, whether you’re eligible, and the value of your policy.
