(6 minute read)
For decades, life insurance policies have provided seniors with peace of mind that their beneficiaries will be well taken care of in the event of their passing. And for many seniors, their policies serve them well—so they have no problem paying the premiums, knowing that they’re investing in their loved ones’ future.
Life is an unpredictable thing, though. So what happens when circumstances change, or your life insurance policy’s premiums become a burden? Fortunately, there is an increasingly popular option that allows policyholders to convert an unwanted or unneeded policy into a valuable cash payout, known as a life settlement.
While the general concept of a life settlement is pretty straightforward, the finer details can sometimes be a little tricky for anyone who’s not a finance expert. That being said, a good financial advisor’s main priority is empowering their clients with the insights and guidance they need to make sound strategic decisions for their future.
It’s with that spirit of empowerment that we’ve assembled this guide to life settlements. Keep reading to learn what it takes to qualify for a life settlement, what its advantages are, and how to go about selling a life insurance policy that you no longer want or need.
Why Are People Selling Their Life Insurance Policies?
For most people, the idea of selling a life insurance policy doesn’t make much sense on the surface. After all, if you sell off your policy, what does that leave behind for your family?
With that in mind, then, is it a good idea to sell your life insurance policy? While it’s true that selling your life insurance policy means forfeiting that death benefit, there are plenty of reasons why a life settlement might make sense. For example, a life settlement often makes sense when:
- Your circumstances or priorities—or those of your beneficiaries—have changed. If the policy no longer fits your needs or lifestyle, there’s not a lot to gain by just letting the policy sit there. And canceling or surrendering your policy won’t net you much value in return. That’s why selling a policy in a life settlement is such a compelling option for so many people—they allow the flexibility and freedom to transform an unwanted policy into cold, hard cash.
- You need to free up some funds. Some life settlement candidates simply don’t need their coverage any longer, so continuing to pay premiums into their policy might feel like throwing money into a hole in the ground. A life settlement means no more premiums—at least not for the policyholder! Other clients are looking to shift their financial priorities from planning for their future to making the most of the here and now. They want to enjoy their retirement as much as possible, which also means making new memories with their loved ones. A life settlement is a great way to free up the funds they need to take a big family vacation, for example.
- The premiums are too much to keep up with. When policyholders struggle to keep up with their policy’s premiums, the stress and uncertainty can affect their quality of life. As a practical consideration, a life settlement starts to make a lot of sense. While we don’t encourage making rushed decisions, for some clients a life settlement can provide liberation from burdensome premiums.
What Types of Policies Are Eligible for Life Settlements?
Several types of life insurance policies are typically eligible for a life settlement—including whole life, universal life, joint life or second-to-die, variable universal life, and indexed universal life policies.
Here, it’s not necessary to get deep into the weeds exploring the difference in these life insurance types. Rather, what’s important is understanding which policy types are eligible—or not—for a life settlement. Speaking with a life settlement broker or financial advisor is the best way to know with certainty whether your policy is eligible, learn how the process works, and to take the first steps toward a settlement.
What about term life policies? As it turns out, the one type of life insurance policy that may or may not qualify is term life. The main factor to consider is whether the term life policy is a convertible one—in other words, if the policy can be converted to a whole life or universal life policy, then it can often be sold as a life settlement (once converted).
Who Qualifies to Sell Their Life Insurance Policy?
To qualify for a life settlement, you’ll need to meet certain requirements based on your age, the details of your policy, and a few additional details. Below are some common criteria for eligibility.
- Age: In most cases, you’ll need to be 65 or older to be eligible for a life settlement.
- Policy Type: Several policy types are eligible for life settlements, including whole life, universal life, and convertible term life policies.
- Death Benefit: The policy’s death benefit must be at least $100,000.
- Premiums: Life settlements often require policy premiums to equal less than 5% of the policy’s face value.
- Date Issued: You’ll often need to maintain a policy for at least 25 months to qualify for a life settlement; this requirement varies by state.
- Ownership Type: In addition to individually-held policies, policies held by foundations, corporations, nonprofits, or trusts may also qualify for a life settlement.
Do I Qualify for a Life Settlement?
If you meet the criteria outlined above, there’s a good chance you can convert your life insurance policy into a cash payout. You can use our handy sell my life insurance policy calculator to see if you qualify, or send us the details of your case.
At What Age Can You Sell Your Whole Life Insurance Policy?
In most cases, a policyholder needs to be at least 65 years old to qualify for a life settlement. This is not necessarily a hard-and-fast rule, though—in reality, age is just one factor in the equation. The policyholder’s health status and life expectancy also play a role. In some cases, policyholders under 65 can pursue a life settlement, provided they meet certain criteria like having a terminal diagnosis.
There’s an important distinction to make here. Selling an unwanted policy before turning 65 often involves a viatical settlement, a special type of transaction reserved for those with a life expectancy of less than two years as a result of a medically-diagnosed terminal condition.
Can I Sell My Term Life Insurance Policy for Cash?
While not every life settlement broker deals with term life policies, selling a term life insurance policy is another option for some (but not all) policyholders. There is one significant caveat, though: your term life policy must be a convertible policy, and it must be converted to an eligible policy type before pursuing a life settlement.
Whole Life vs Term Life Insurance: What Are the 2 Main Differences between the Types of Life Insurance Policies?
There are two main differences between a whole life and term life policy: their term and cost.
- Term: A whole (or universal) life policy remains in effect indefinitely—as long as the policyholder continues paying their premiums. A term life policy, on the other hand, is in effect for a set term, usually between 10 and 30 years.
- Cost: While term life policies are considered more affordable due to their lower premiums, unlike whole life policies they ultimately bear no cash value.
Who Buys Term Life Insurance Policies?
For the most part, life settlement providers (companies that purchase life insurance policies) will only purchase a term life policy if it meets requirements like having a conversion rider written into the policy. Think of it this way: an ordinary term life policy likely won’t qualify, but if it can be converted into a whole life policy, it may then become eligible—provided it meets the additional criteria covered throughout this article.
How Long Do You Have to Have a Life Insurance Policy before You Can Sell It?
Generally, a life insurance policy needs to be in effect for at least two years before it qualifies for a life settlement. Note that each state sets their own requirements, however—in some states, you may need to have held the policy for 3 or more years before it’s eligible for a life settlement.
How Much Can I Sell My Life Insurance Policy For?
You can typically sell an unwanted or unneeded life insurance policy for roughly 20% of the policy’s face value or death benefit. Plus, you get relief from paying the monthly premiums, freeing up funds for other uses. Of course, for some seniors, the 20% figure will sound rather low, but it’s all about context—and getting the most value out of your policy. For the sake of comparison, a life settlement typically pays out anywhere from 4-7 times as much as a policyholder receives by simply surrendering their policy or letting it lapse.
How Much Can You Sell a $100,000 Life Insurance Policy For?
If a life settlement nets you around 20% of a policy’s face value or death benefit, the cash value of a settlement on a $100,000 policy amounts to around $20,000. While some variables apply, this figure will generally exceed the policy’s cash surrender value, but less than what the net death benefit (policy’s stated benefit minus unpaid premiums and outstanding loan balances) would be.
By comparison, if you were to simply cancel your policy or stop paying its premiums, you would, at most, only receive an amount which equals the cash surrender value.. In other words, you’ll receive a portion of the total amount you’ve paid in premiums over the life of the policy (and you’ll receive it tax-free).
Is a Life Settlement Taxable?
Yes—assuming you make a profit on the transaction, a life settlement is taxable. And while few people are thrilled to get into the nuanced details of taxation, it’s not nearly as complicated today as it was prior to the Tax Cuts and Jobs Act of 2017, which significantly simplified how life settlements are taxed.
Basically, whatever net proceeds you receive from the settlement are taxed as long-term capital gains—if the amount you received in the settlement exceeds the amount of premiums you have paid into the policy known as your ‘cost basis’.
Is Selling Your Life Insurance Policy a Good Idea?
At LSA, we’re in the business of empowering our clients to make sound decisions for their financial future. Whether you’re still not sure whether your policy is eligible—or whether the pros will outweigh the potential downsides of a life settlement—we’re here to help!
Next, let’s look at some of the key questions you should ask your financial advisor when deciding whether a life settlement is right for you.
- Is there a chance I’ll regret selling my policy? If there’s any chance you might need your policy in the future, it’s not a great idea to rush into a life settlement. On the other hand, if you can no longer afford the premiums, you need funds now, or your beneficiaries no longer need the coverage, it might be a fine time to sell your policy. You could also opt to sell part of your policy, so you can retain at least a portion of the death benefit for your loved ones.
- What are the alternatives to a life settlement? There may be other options outside of maintaining your policy or seeking a life settlement. If you have a pressing need for cash but also want to keep your policy, you may be able to take out a loan against the face value of the policy, for example. You might also consider surrendering or selling just part of your policy, reducing the policy’s coverage, or other alternatives. A financial advisor can help you consider all of the possibilities and make the best decision for your situation.
- What is a fair life settlement offer? While a life settlement is generally worth about 20% of the policy’s face value, no two life settlement companies are likely to provide identical offers. Working with a financial advisor or life settlement broker is often the easiest way to find the best life settlement companies for your consideration.
- What about taxes? As much as the average person hates thinking about taxation, it plays a role in how life settlements are calculated—and how much net value the policyholder receives in the transaction. Your financial advisor can help you understand how these transactions are taxed, and what you might be able to do to reduce or offset the tax burden.
- How will this impact my beneficiaries? It’s really important to understand the finer details of how a life settlement might impact your beneficiaries. After all, most people purchase life insurance policies for their benefit, to ensure that they are well taken care of if/when the policyholder passes away. Before surrendering or selling your policy, you’ll want to think through this impact, and a financial advisor can help you to develop a plan that works for you.
Are You Thinking about Selling Your Policy?
If so, we’d love to hear from you. We’ll help you consider whether or not a life settlement is right for you, and guide you through the process of finding a buyer and securing your payout. Here’s how it works:
- See if you qualify. Start by using our eligibility calculator to see if your policy qualifies for a life settlement.
- Apply online. Use the resources on our case submission page to review the eligibility criteria and complete the application questionnaire.
- Wait for a decision. Once our team receives your application, we’ll carefully review it (as well as any supporting documentation) to determine the best approach to selling your policy.
- Receive offers. After we’ve had a chance to review and process your application, we’ll present you with multiple offers based on your personal policy details.
- Sell your policy. If you accept the provided offer, we’ll process the transaction and you’ll receive your payout.
Let’s Connect!
Why keep paying premiums on a life insurance policy that no longer fits your lifestyle? If you’re ready to see what your policy is worth, reach out or submit your case today to connect with our team of life settlement brokers. We look forward to hearing your story, reviewing your case, and helping you transform your policy into a cash payout.
