While insurance policies provide a measure of protection against financial hardship after death, their value isn’t immutable. For example, some seniors find they have enough money in savings or investments that life insurance is no longer necessary. Others could benefit from keeping more money in their pockets each month and getting some back for the current value of their policy.
Selling your life insurance policy, also known as a life settlement, offers a way to convert unwanted or unneeded policies into cash payouts. Not sure how it works? We’ve got you covered with what to know about life settlements, what you can expect to get, and how the process works.
WHY WOULD YOU SELL A LIFE INSURANCE POLICY
You can sell your policy for any reason. Some of the most common include:
Change in Your Life Circumstances
If life circumstances have changed for you or your close family, a life settlement can provide quick access to cash. For example, someone in your family might be facing a challenging and expensive medical issue. Or, you might decide to sell your policy and make necessary repairs to your house. Whatever the reason, a life settlement offers a way to access the value you’ve built in your policy.
You Want to Free Up Some Funds
You might choose a settlement because you no longer need your policy or because you have other investment plans for the money. Some seniors also choose to cash in their policies and kickstart their retirement with a trip around the world or a move to somewhere warmer, sunnier and more relaxing.
Your Premiums Are Too Expensive
You may also find that your premiums are getting too pricey. This can cause unnecessary financial stress and anxiety. Selling your policy means you’re no longer on the hook for premiums and get some cash in your pocket.
HOW DOES A LIFE SETTLEMENT WORK?
You have two choices when selling your policy: Cash surrender and life settlement.
In a cash surrender, you cancel the policy. The cash surrender value is the total amount of premiums you’ve paid, minus the cost of insurance, plus any interest accrued. There may also be surrender fees.
In a life settlement process, you sell some or all of your policy to a third party. The terms of the sale are negotiated, typically by a broker, rather than tied to a specific cash value. When the policy is sold, you receive a lump sum, and the buyer takes over the policy. This means they pay all premiums and collect the death benefit.
WHAT TYPES OF POLICIES ARE ELIGIBLE FOR LIFE SETTLEMENTS?
Most policy types are eligible for life settlements, including:
- Whole life
- Universal life
- Joint life
- Second-to-die
- Variable universal life
- Indexed universal life
The only type of policy that may not qualify is term life. However, if the policy is convertible — meaning it can be converted into a whole or universal life policy — it may be eligible after conversion.
WHO QUALIFIES TO SELL THEIR LIFE INSURANCE POLICY?
There are also certain conditions you need to meet to sell your policy. Common criteria include:
- Age: In most cases, you need to be at least 65 to be eligible for a life settlement.
- Policy type: As noted above, most types of life insurance are eligible for a settlement, except non-convertible term life.
- Death benefit: To sell your policy via settlement, the death benefit must be at least $100,000.
- Premiums: Some settlements require your policy premiums to equal less than 5% of your policy’s face value.
- Issue date: While this number varies by state, you typically need to hold a policy for at least 25 months before it’s eligible for settlement.
- Ownership type: Individually owned policies qualify for settlements. Those held by foundations, corporations, nonprofits or trusts may also qualify.
HOW MUCH CAN I GET FOR MY POLICY?
Exact returns vary, but you can typically sell your policy for around 20% of its death benefit. If you have had significant health changes since your policy was issued, you you can expect to receive more than 20%.. Unlike a cash surrender, life settlements are negotiated on a case-by-case basis.
For example, if you have a $200,000 policy, you may receive a $40,000 cash payout. While this may seem low compared to the total coverage of the policy, cash surrender values are much lower. On average, life settlements pay out four to seven times more than surrendering your policy.
Plus, a life settlement broker works to find multiple offers for your policy, giving you leverage to negotiate for a larger cash settlement.
ARE LIFE SETTLEMENTS TAXABLE?
Life settlements are taxable if the proceeds of the sale are greater than the total premiums you’ve paid into the policy. An advisor can help dig into the details of taxation and cash payouts, but here’s a simple explanation: Whatever net proceeds you receive from your settlement are taxed as long-term capital gains.
HOW DO I GET STARTED WITH A LIFE INSURANCE SETTLEMENT?
At Life Settlement Advisors, it’s our mission to help you make sound financial decisions. We’ll help you evaluate the potential benefits of selling your policy and guide you through the settlement process from start to finish. Here’s how it works:
- Step 1: See if you qualify. Use our online eligibility calculator to see if your policy qualifies for a life settlement, or give us a call at 888-849-0887.
- Step 2: Apply online. Use the resources on our case submission page to review eligibility criteria and complete our application questionnaire.
- Step 3: Wait for a decision. Once we have your application and a copy of your policy, we’ll carefully review it and get in touch with a decision.
- Step 4: Receive offers. Next, we’ll present you with multiple offers based on your policy details.
- Step 5: Sell your policy. If you accept an offer, we’ll process the transaction, and you’ll receive your payout.
LET’S CONNECT
Tired of paying premiums on a policy that no longer fits your lifestyle? Connect with our team of life settlement brokers today. We’ll answer your life settlement questions, find out what your policy could be worth, and start the process of transforming your policy into a cash payout.
