Here’s How Selling A Life Insurance Policy Works
If you’re holding onto a life insurance policy you do not want or need, a life settlement may be the right option.
We want to give seniors, their families, and their financial advisors the right knowledge they need to evaluate their life insurance policy and consider the option of life settlements.
Have questions about your specific situation? Ready to learn more about the life settlement process?
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Watch the video below to learn more.
- Table of Contents
Selling a Life Insurance Policy
Did you know you can sell all or a portion of a life insurance policy, even term insurance?
If you have a life insurance policy you no longer want or need, selling it—rather than lapsing or surrendering it—may be a good option. However, as with any significant financial decision, it is important to understand the ins and outs of what this decision entails, including what kind of return you can expect, what the requirements are, how to get started, and what the process is really like.
We’ve compiled this ultimate guide to selling a life insurance policy to openly and transparently answer all your questions about the process.
How Can I Sell My Life Insurance Policy for Cash?
Selling a life insurance policy for a one-time cash payment is probably more common than you think. In the financial world, this is often called a life settlement, and it can offer increased liquidity for those who need it. But what does it mean to sell a life insurance policy? In simple terms, a life settlement is the sale of a life insurance policy that—for myriad reasons—is no longer wanted or needed. For the original policyholder, this results in a one-time cash payment. The investors and companies that buy life insurance policies assume the responsibility of paying the premiums and ultimately receive the death benefit upon the passing of the original policyholder. Later in this article, we’ll talk more about why you may wish to sell your policy and what the process is like.
Before exploring further, it is essential to note that there are two basic kinds of settlements: life settlements and viatical settlements.
- Life settlements are designed for seniors (typically age 65+) who have had a medical change since their policy was issued and have a life expectancy of fewer than 15 years.
- Viatical settlements are for terminally ill individuals and have a life expectancy of fewer than two years.
As viatical settlements are a somewhat niche situation, and not all companies that purchase life insurance policies offer viatical settlements, the majority of this article will focus on life settlements rather than viatical settlements.
How Much Do You Get for Selling Your Life Insurance Policy?
While every sale is different, a life settlement (selling your life insurance policy) will typically result in higher dividends than surrendering a policy. In fact, a life settlement often yields between four and seven times the amount of money than what the surrender value would be.To put that in perspective, many people understandably wonder, “How much money do you actually get when you sell your life insurance policy, when it’s all said and done?” Recent data suggests you can recoup around 20% of a policy’s face value in a life settlement.
So, what is the cash value of a $100,000 whole life insurance policy? If we apply the 20% figure suggested above, the cash value would be right around $20,000—which is much better than the policy’s surrender value.
Unfortunately, too many people are unaware that selling their life insurance policy is an option and opt for the lower-value surrender. Worse yet, others simply lapse their policy, which means they’ll see no return on the premiums they invested. It is estimated that roughly $200 billion worth of life insurance will lapse every year between 2018 and 2027. In many cases, a life settlement could provide a lump payout for medical bills, retirement, or investments.
Am I Eligible to Sell My Life Insurance Policy?
Generally speaking, there are five requirements that must be met to be considered for a life settlement. These requirements include:
- Policyholder’s age
- Type of life insurance policy
- Current premiums
- Death benefit amount
- Current medical conditions of the insured
For example, the ideal life settlement client is a male or female who is in their mid-70’s or older who has undergone a change in health since the issue date of the policy. This individual must have a life expectancy of fewer than 15 years. Keep in mind this is an ideal description, and the actual requirements are more nuanced.
Below we have compiled a list of frequently asked questions about life settlement qualifications to expand upon the finer details of the requirements.
At What Age Can You Sell Your Life Insurance Policy?
The ideal life settlement candidate is in their mid-70s or older, but individuals 65 and older may be able to sell, especially if chronic medical conditions are present. The policyholder must have a life expectancy of under 15 years, along with a change in health since the policy was issued.
However, this is different for viatical life settlements, which are settlements designed for terminally-ill individuals with a life expectancy of fewer than two years. Individuals younger than 65 with a terminal illness may be eligible for a viatical settlement. This can be used to help pay for medical bills and any other expenses.
Can I Sell My Term Life Insurance Policy for Cash?
Term life insurance policies may be sold if they have a convertibility option. This option converts a term life insurance policy into a whole or permanent life insurance policy. It might cost money to convert a policy, but it may be a worthwhile investment, depending upon other circumstances. Before making the decision to convert a policy, policyholders should review the fine print to understand what costs they may incur or review the decision with a financial advisor.
What About Other Types of Life Insurance Policies?
Along with convertible term life insurance policies, most other policies can be sold via a life settlement too. This includes whole life, universal life, joint life or second to die, variable universal life, or indexed universal life.
It is important to note that most companies that buy term life insurance policies, similar to those that buy whole life only, have certain eligibility requirements. For example, most require that a policy be active for at least 25 months in order to be sold. With that said, there are states that require a policy to be active for at least five years before it can be sold. A life settlement advisor or wealth manager can look at the requirements for a specific location to determine whether or not a policy is eligible for sale.
What Requirements Are There for Premiums and Benefits?
Policy premiums typically need to be less than 5% of the face value for a life settlement. In general, the lower the premium the more valuable the policy. This is because the policy buyer will assume the payment of premiums, so they typically want policies with lower monthly costs.
In addition to this, death benefits must payout at least $100,000 to qualify for a life settlement. Remember that with a life settlement, the buyer of the policy will receive the death benefit once the original policyholder passes. Keep in mind that policies with higher death benefits—and therefore higher premiums—may still be something an investor is interested in.
If you’re wondering, “Can I Sell My Life Insurance Policy?” This calculator can be used to check whether or not your policy is eligible and you meet the requirements. It’s important to note that while this tool will answer your basic questions, a detailed application is required to begin the life settlement process in earnest.
When It Makes Sense to Sell Your Life Insurance Policy for Cash
Even if you meet the basic qualification to sell a policy, it is still important to consider whether or not a life settlement makes sense for your financial situation, lifestyle, and needs. In general, financial advisors and other kinds of wealth managers are well-suited to assist you in determining if it’s a wise financial decision.
With that said, there are a few situations in which policyholders may opt for a life settlement. These include dealing with unaffordable premiums, needing access to immediate liquid funds, finding your circumstances and beneficiary needs have changed, or seeking to downsize a policy.
The Premiums Have Become a Burden
If your life insurance premiums have become unaffordable or unmanageable, you may be considering lapsing on the policy or surrendering it. However, before moving forward with either of those options, consider looking into selling your policy. For those who qualify, life settlements often offer a higher payout than the surrender value—putting more money directly into your pocket.
There Is a Need for Immediate Funds
Sometimes, policyholders need access to immediate liquidity. If this is the case, a life settlement can provide a one-time lump sum to help pay for medical bills or other unforeseen expenses. Money gained from the sale of a life insurance policy can also be used to supplement retirement savings when needed, too. Others simply want access to liquid assets to create new investments or travel. The options on how to use the payout are limitless.
There Is a Change in Circumstances
As we get older, it’s not uncommon for our circumstances to change. Policies that were purchased to temporarily replace income, cover dependent care, pay for end-of-life expenses, or create an inheritance simply may no longer be needed. If you are divorced or widowed and do not have dependents who need the financial benefits provided by a life insurance policy, seeking a life settlement can provide a payout to help cover expenses now, not later.
There Is a Desire to Downsize the Policy
One of the major benefits of a life settlement is that you can sell a portion of a policy. In this case, the buyer pays for all of the monthly premiums and they receive a portion of the death benefit. However, the policyholder retains a portion of the death benefit for their beneficiaries, all the while paying no additional monthly premiums. This is often accomplished through a contractual promise on the part of the buyer to pay a death benefit in the future. This is an excellent option for those who still want or need some coverage but cannot afford to keep paying steep premiums.
What are the Pros and Cons of Selling Your Life Insurance Policy?
Before selling your life insurance policy, it can be helpful to understand the advantages and disadvantages of a life settlement. After all, entering any major financial situation should not be done lightly; policyholders need to understand what will happen when they sell their policy to prepare themselves and any beneficiaries for changes or repercussions.
What Are the Advantages of a Life Settlement?
There are two main advantages of a life settlement: a substantial lump-sum payment and freedom from paying any more premiums on an unwanted or unneeded policy.
- One of the biggest advantages of selling a life insurance policy is the one-time, lump-sum payout that it comes with. This provides immediate liquid assets for the policyholder, which can be used for things like medical bills, retirement, or even to travel with family members. The fact is, surrendering a policy just doesn’t pay out as much as a life settlement. The average surrender value of a life insurance policy is $460 for every $100,000 in value. However, a life settlement is likely to return at least 20% of the death benefit of the policy, which is often significantly higher. In the example above, 20% of $100,000 is $20,000—much higher than the $460 above.
- In addition to receiving the payout, selling a life insurance policy means that sellers no longer have to worry about paying costly premiums. Even those who choose to sell only a portion of their policy can benefit as they will no longer pay any premiums while receiving a portion of the death benefit.
What Is the Downside of Selling Your Life Insurance Policy?
While a life settlement is almost always preferable to simply surrendering a policy, there are a few finer details you should be aware of, including:
- Tax Consequences | It is important to note that policyholders will likely have to pay taxes on at least part of the payout they receive. So, exactly what are the tax consequences of selling a life insurance policy? Essentially, you must pay taxes on any amount you receive that exceeds the amount of the seller’s basis (or what you paid in premiums). For example, if you paid $30,000 in premiums and received a $45,000 life settlement, you would need to pay taxes on the $15,000 difference. However, working with a financial advisor can help you plan for this situation.
- Burdensome Process | For some, selling their life insurance can be a difficult process, from finding a buyer to working through all the legal paperwork and requirements. However, this disadvantage is easily overcome by working with a life settlement company like Life Settlement Advisors. Life settlement companies can educate you on the process and work with you and your wealth advisor during every step of the process.
- No Beneficiary for Heirs | For those policyholders who still have heirs, it is important to remember that selling their entire policy means their heirs will not receive a death benefit. However, policyholders in this situation may be interested in selling a portion of their policy, which would provide a payout while still retaining a portion of the death benefits for loved ones.
By understanding the basic advantages and disadvantages of life settlements, you and your financial advisor can make the best possible decision for you and your family. Next, let’s explore what the actual process looks like.
How to Sell a Life Insurance Policy
Once you have decided to look into selling your life insurance policy, you likely have a lot of questions, including how to find the best companies that buy life insurance policies, as well as how it all works. To help you out, we’ve compiled a list of questions—including step-by-step instructions on using a free life settlement calculator, filling out an application, and what to expect throughout the process.
Who Buys Life Insurance Policies?
You may be wondering who actually buys life insurance policies. In the industry, there are two major terms to be aware of: life settlement brokers and life settlement providers.
- First, there are the life settlement brokers. Also known as life settlement companies (and not to be confused with the life insurance companies that sell the original policies) these companies facilitate the process for the individuals looking to recoup value from their policies. They work on policyholders’ behalf by walking them through the process, shopping around the policy, securing offers, and completing all the necessary paperwork. Life settlement companies typically work on commission and receive a set percentage of the sale. Here at Life Settlement Advisors, we are a life settlement company with more than 24+ years of experience in the life settlement industry.
- Second, there are life settlement providers, also known as direct buyers. Providers purchase policies from policyholders. While these are sometimes purchased to keep as their own investment, most providers purchase policies on behalf of an investor or financial institution. Providers want to purchase the policy for the least amount possible, they do not shop the sellers policy. Their business model is buy low and sell high.
What Are the Steps of Selling a Life Insurance Policy?
While selling a life insurance policy is an important decision that may take time to make, once you decide to sell the process is fairly straightforward. This is especially true when working with a life settlement broker who can educate you on the process and walk you through it. There are five basic steps to selling a life insurance policy:
1. Find Out if You Qualify
Before any other work can be done, you must first find out if you qualify. You can do this by filling out a selling your life insurance policy calculator to find out if your situation meets the basic qualifications. It will ask about your gender, age, health, type of policy, as well as the premium amount and death benefit amount.
2. Complete an Application
Once you’ve used the calculator to determine that you meet the basic eligibility requirements, you should fill out a more detailed application. The application will include questions about your policy, lifestyle information, family history, detailed medical history and a list of prescriptions, and contact information for your physicians. If working with a life settlement broker or a financial advisor, they may be able to assist in filling out the information about your policy.
You will also need to provide a copy of the policy, your most recent annual statement, your current policy illustration, and a copy of the trust (if trust owned). The information you provide will be used to determine if your policy can be sold, so it is important to fill it out accurately.
3. Have Application Reviewed
Upon receiving your application, policy, and medical records, life settlement companies will determine whether or not you qualify to enter the life settlement market. Most life settlement companies, including our team at Life Settlement Advisors, work with third-party, independent underwriters to ensure the accuracy of this process.
4. Receive an Offer
Once an application is accepted, the policy is placed on the life settlement market to solicit offers. Offers are made based on the information you provide. A life settlement company will provide you with the offer(s) and you will have the opportunity to accept or reject the offer. In this step, a life settlement broker or financial advisor may be able to recommend whether or not you should accept the offer.
5. Sell Your Policy
If you accept an offer, you will receive a closing packet to complete and sign. While this might sound like a lot, packets contain pretty standard documents, such as a contract, many disclosures, an insurance verification, a signed letter stating that you’re of sound mind to make this decision, and a change of ownership form. Once it is completed, you will receive one lump payout for your policy. You will no longer need to worry about the policy, including paying premiums, even if you only sold a portion of your life insurance.
How Do You Find the Best Company to Sell Your Life Insurance Policy to?
The best and easiest way to sell an unwanted or unneeded life insurance policy is to work with a life settlement company that knows and understands the process. When searching for the best life settlement companies, look for life settlement advisors who meet the following criteria.
- They are willing to educate you, walk you through the process, and answer any questions you may have. This is an important decision, and the right company recognizes that.
- They offer free consultations. At the end of the day, you need to decide if a life settlement is the right option. The best life settlement companies offer free consultations to help you decide
- They have experience in the industry. Look for a company that has been in the life settlement industry for years so that they will understand the ins and outs of the process.
- They are clear and transparent about what they do. As with any financial situation, it is important to work with a company that is open and honest about its process.
- They are responsive and have excellent customer service. Good life settlement advisors understand how important selling a policy can be. They should provide fast quoting and excellent customer service to make this process as simple as possible.
Explore Your Options Today with Life Settlement Advisors
Is it worth it to sell your life insurance policy? Ultimately, only you can decide—but you don’t have to make that decision alone. At Life Settlement Advisors, we strive to be a voice of confidence and assurance for our clients. Our goal is to educate you about the life settlement process so you can make an educated decision about whether it is right for you. Learn more about the qualifications associated with selling a life insurance policy today.
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.
Get in touch with Life Settlement Advisors today to take the first step toward converting your policy into cash.