Did you know you can sell all or a portion of a life insurance policy, even term insurance?
(5 minute read)
Nearly 85% of life insurance term policies don’t terminate by paying out a death benefit. Why is this? Often, policyholders either surrender their policy or let it lapse before the benefits are realized in order to meet immediate financial needs . However, these options offer little or no return beyond relieving yourself of premium payments.
With a life settlement, qualifying policyholders can get more money out of their life insurance to cover the costs they are facing now. When someone is considering selling a life insurance policy in a life settlement, they are usually curious about the pros and cons of the decision. Some frequently asked questions include:
- What exactly is a life settlement?
- Do I qualify for a life settlement?
- What are the benefits of selling your life insurance policy?
- How much is my life insurance policy worth?
- What are my options for selling my life insurance policy for cash?
- Do I have to pay taxes if I sell my life insurance policy?
- Is it possible to take a loss on the sale of a life insurance policy?
If you’re wondering about some of these questions or others, you’ve come to the right place. Let’s review the pros and cons of selling a life insurance policy in a life settlement.
What Exactly Is a Life Settlement?
A life settlement is a transaction on the secondary market in which you can sell a portion of or your entire life insurance policy to an investor for cash. The purpose of a life settlement is often to reduce or eliminate the premiums you pay while receiving the cash value of the policy now, rather than waiting for it to go to your beneficiaries.
Why Would a Company Buy Your Life Insurance?
Companies buy life insurance policies as investments. When the policy comes to term, its value is often greater than the premiums they will pay into it (especially since you’ve already paid a lot in premiums). So, is there a best company to sell your life insurance policy to? There usually is, but the best buyer for your policy depends on your current situation—and theirs. That’s why working with a professional, like those at Life Settlement Advisors, can help you get the most for your policy.
Do I Qualify for a Life Settlement?
A life settlement can be a lucrative way to deal with an unwanted life insurance policy, but to qualify, you must meet very specific requirements.
- Age: At what age can you sell your life insurance policy? You are eligible for a life settlement at age 65, but ideal candidates are usually in their 70s or older.
- Life Expectancy: You must have a life expectancy of less than 15 years with a change in health since you were issued the policy.
- Payout Benefit: Your death benefit payout must be at least $100,000.
- Policy Duration: You must have held your current life insurance policy for at least 2 years.
You can also use our qualification calculator to see if you qualify and if your policy is worth selling.
Can You Sell Your Life Insurance Policy If You Are under 65?
Yes. you can qualify to sell your policy if you are under the age of 65. You must have had a significant health change since the policy was issued.
- Age: You can be any age to qualify for a viatical settlement.
- Life Expectancy: Your life expectancy must be less than 2 years caused by a medically diagnosed terminal condition.
- Payout Benefit: Your death benefit payout must be at least $100,000.
- Policy Duration: You must have held your current life insurance policy for at least 2 years.
Viatical settlements have different age and life expectancy requirements than a life settlement and the same qualifications for payout benefit and policy duration.
Is Selling Your Life Insurance Policy a Good Idea?
Selling a life insurance policy in a life settlement is often worth it for those who qualify. Policyholders usually consider a sale because they no longer want or need their policy. In those cases, the policyholder can choose between the option of a life settlement, surrendering their life insurance policy, or letting it lapse. Here are some of the pros of choosing a life settlement:
Pros of Selling Your Life Insurance Policy through a Life Settlement
- You get the value of your policy now. The purpose of life insurance is to ensure that your beneficiaries will be able to support themselves and cover end-of-life costs in the event of your death. But what if you don’t have beneficiaries or if your family is already well-supported and they don’t need the payout from your policy to get by? What if you currently need the money to pay debts or check items off your bucket list? A life settlement allows you to use your money now for whatever you need.
- You get more cash than by surrendering or lapsing. Surrendering your policy back to the issuer usually means settling for cents on the dollar, even when the policy has been held for years. In fact, the average surrender value of a life insurance policy is only $460 for every $100,000 in value. This means even if you have been paying into a million-dollar life insurance policy for years, you may only get a return of around $4600.
So, what percentage do you get when you sell your life insurance? A life settlement, by contrast, often nets at least a 20% return on the death benefit of the policy. That means for the same million-dollar policy, you would get $200,000. In short, selling your life insurance policy, even term insurance, is usually a far better move than surrendering it back to the insurance company or letting it lapse!
- You reduce or eliminate the burden of costly premiums. When you sell your life insurance policy through a life settlement, the buyer takes over full responsibility of paying the premiums. That means you get immediate value in the lump sum of cash and long-term savings.
When it comes to getting the most out of your life insurance policy, a life settlement is almost always a better choice than surrendering it or letting it lapse. You ease the burden of having to pay premiums, you get the highest value for your policy, and you get the money out of your policy.
CONS OF SELLING A LIFE INSURANCE POLICY FOR CASH
Sure, there are a lot of pros to selling your life insurance through a life settlement. But, if you’ve never heard of the option before, you may be wondering, “Is it bad to cash out a life insurance policy and what are the tax consequences of cashing in a life insurance policy?” Every situation is different and it helps to speak with an advisor to choose the best option for you. During your decision making process, you should be aware of the following cons of selling your life insurance policy for cash.
Cons of Selling Your Life Insurance Policy through a Life Settlement
- Life settlements are considered taxable income. While there are not many cons to a life settlement, one that is top of mind for many individuals is the question of taxes. Whether you surrender or sell the policy, you will have to pay taxes on any amount you earn that exceeds the premiums you have paid. For instance, if you have paid $25,000 in premiums over the lifetime of the policy, and get $30,000 in a life settlement, you would have to pay taxes on $5,000.
While the greater returns that are earned through a life settlement may have you concerned about tax liability, remember that working with a financial advisor or another professional can help you manage expenses to minimize liability and reduce necessary payments at tax time.
- Your beneficiaries will receive a reduced or eliminated payout. Another con of selling a life insurance policy in a life settlement is that your heirs will not receive the death benefit. This is why Life Settlement Advisors thinks it is so important to educate policyholders that it is possible to sell only a portion of a policy in a life settlement. That means the option to earn money on some of the policy’s face value while also retaining the benefits for family or other loved ones.
While the cons can seem daunting, they can often be overcome by sitting down with a professional to clear up any confusion and go over your options.
FIND OUT IF YOU QUALIFY FOR A LIFE SETTLEMENT
Deciding whether or not to sell your life insurance policy through a life settlement can be a difficult process to navigate alone. The good news is that you don’t have to.
People over the age of 65 who no longer want or need a life insurance policy may wonder if they qualify to sell a life insurance policy in a life settlement. That’s why we created our life settlement calculator, to help policyholders make informed decisions about their assets and financial future. You can also check out some of our life settlement success stories from 2020, to learn more about how others have used this transaction to transform their lives and fund their futures, even during times of economic crisis.
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.
Leo LaGrotte
Life Settlement Advisors
llagrotte@lsa-llc.com
1-888-849-0887
