Did you know you can sell all or a portion of a life insurance policy, even term insurance?
85% of policies terminate without paying out their benefit and offering little compensation instead. Why is this? Oftentimes, immediate financial needs take precedence over future ones. Without awareness of all of their options, policy holders turn to surrendering their policy or letting it lapse.
For qualifying individuals, selling a life insurance policy can offer a higher return on an unwanted insurance policy than a surrender or lapse. Find out if you are eligible for a life settlement and how much your policy could be worth.
What Is a Life Settlement Contract?
A life settlement contract is the document that signifies the transaction between the buyer of a life insurance policy and the seller. This type of contract is not between an insurance provider and a buyer—it’s between the policy holder and a third-party investor, such as a bank or an investment firm.
For the seller, the purpose of a life settlement is to exchange an unwanted life insurance policy for cash. For the buyer, a life settlement is an opportunity to receive a payout that is larger than the premiums they will be responsible for.
How Much Is a Life Settlement Worth?
The average life settlement returns approximately 20% of the death benefit payout. Since your benefit must be at least $100,000 to qualify for a life settlement, the average minimum return would be about $20,000. When it comes to determining exactly how much life settlements pay, buyers take certain factors like your current health and premium rates into account.
While that may not sound like much compared to the entire benefit, you are also saving the cost of monthly or annual premiums. Considering that the average annual premiums for a term life insurance policy of $500,000 is between $8,000 and $9,500 for men and women aged 70 or older, those savings can add up quickly.
A life settlement is not your only option for dealing with an unwanted policy, but it will get you the highest return. The other ways out of your life insurance policy are to either surrender it or let it lapse. Surrendering a policy typically has a return of $469 per $100,000 (less than 0.5% compared to 20% from a life settlement). Letting your policy lapse gives up full claim to the benefits and has no payout. Both of these options do relieve the policy holder from paying future premiums, which is why many resort to them when they aren’t aware of all of their options.
What Is a Life Settlement Company?
Life settlement companies act as brokers between holders of an unwanted life insurance policy and potential buyers. Each policy is unique and so is each buyer, so it’s usually best to have a professional help you navigate the market and find the best deal for your situation.
When choosing the life settlement company to represent you, work with one that will be with you through the whole process. From seeing whether or not you qualify to weighing whether or not this is the best decision for you, a professional can help you secure the best deal possible.
Who Qualifies for a Life Settlement?
In order to protect policy holders, life settlements have a strict set of qualifications. When considering if a life settlement is right for you, ensure that you meet the following requirements (you can also use our qualification calculator):
- Policy Age: To qualify for a life settlement, you must have held your current policy for at least 2 years.
- Death Benefit: Your death benefit must be at least $100,000.
- Age: You must be at least 65 years old to be eligible for a life settlement, and ideal candidates are typically 75 or older.
- Lifespan: You must have experienced a change in health and have a life expectancy of less than 15 years to qualify.
There are also additional factors that may affect your eligibility for a life settlement. Lifestyle, gender, loans against your policy, and annual premium cost also influence whether or not you qualify. Remember, even after you qualify, these factors can influence how much you get offered for your policy.
Even though you must be at least 65 years old to qualify for a life settlement, you may have heard of other options for selling your policy. So, can you sell your life insurance policy if you are under 65?
Yes, it is possible to sell your policy regardless of age through a viatical settlement, but there are other strict requirements. Viatical settlements are only available to those who have had a terminal medical diagnosis resulting in a life expectancy of 2 years or less, have held their current policy for at least 2 years, and have a death benefit worth at least $100,000. Because of their unique circumstances, only specialized brokers handle viatical settlements.
Is a Life Settlement a Good Idea?
A life settlement can be the ideal solution for someone who currently holds an unwanted policy, but every situation is different. It’s important to weigh your current financial needs and those of your beneficiaries.
Here are some questions that can help you prioritize your goals for your policy:
- Do I have any debts that need to be paid?
- Are there things I want to do but can’t afford to?
- Are my premiums a manageable expense?
- Are my beneficiaries still dependent on me?
While these topics can be difficult to think about and discuss with loved ones, it is important to fully understand how your policy is impacting you and your beneficiaries.
Pros and Cons of Selling a Life Insurance Policy
To help you figure out if a life settlement is right for you, consider the following list of the pros and cons of selling a life insurance policy.
Pros of Selling a Life Insurance Policy
- You get the benefit of your policy. Whether you are looking for money to pay off debts or check items off your bucket list, a life settlement can put cash in your hands now—not later. When you sell your policy, you get a lump sum of cash that you are free to do what you wish with.
- You free yourself from some or all of your premium payments. As we mentioned earlier, a term policy (one of the cheaper options) can cost someone who’s 70 years old between $8,000 and $9,500 per year. When you sell your policy, you can either sell part of it or the whole thing, and your premiums are reduced proportionally.
- Life settlements pay more than surrendering your policy or letting it lapse. Life settlements tend to give at least a 20% return of your benefit, while surrendering your policy averages a 0.5% return and letting it lapse leaves you with nothing. Use our life insurance payout calculator for an estimate on how much your policy could be worth.
The pros of a life settlement all share one theme: giving you control over your finances.
Cons of Selling a Life Insurance Policy
- Life settlements are taxed. When you sell your life insurance policy, you pay income tax on your gains. To calculate your gains, subtract the total of the premiums you paid on the policy from the cash lump sum you acquired from selling it. What happens if you keep your policy? Are life insurance payouts taxed? When it comes to your beneficiaries, any payout they would receive would be tax-free, according to the IRS. Tax laws frequently change, so be sure to consult a tax professional during your decision making process.
- Selling your policy forfeits your beneficiaries’ claims to the payout. While this can be a con in certain situations, like if your beneficiaries are still dependent on your income, it isn’t always bad. For example, if your kids are grown and out of the house, then they may not need to rely on the payout from your policy. In cases like this, it might be worth it to have access to your money now instead.
While there are cons to selling a life insurance policy, they are situational and can be navigated with the help of a life settlement advisor.
Life Settlement Advisors: Helping You Chart Your Path Forward
Choosing how to get the most out of your life insurance policy isn’t an easy decision. You have to weigh your current finances with the needs of your beneficiaries and navigate regulations. That’s where we come in.
At Life Settlement Advisors, we’ll walk you through every step of the process. From considering your options to seeing if you qualify and finding a buyer, our professionals will ensure that you can make an informed decision that you are comfortable with.
Do you need a guide through the life settlement process? We can provide you with all of the answers to your questions about selling your life insurance policy. Contact us today to schedule a free consultation.
Did you know you can sell all or a portion of a life insurance policy, even term insurance? Selling an unwanted life insurance policy is no different than selling your car, home or any other valuable asset that will create immediate cash. Contact us today to learn more.
Life Settlement Advisors