Life moves quickly. Changes in health, retirement income needs, or shifting estate plans can make money tight. At the same time, you might not have the same life insurance needs you had years ago. As a result, you may be considering selling a life insurance policy or surrendering an existing policy.
You may not even be aware that this is an option, but selling a life insurance policy — rather than surrendering or letting it lapse — can put more money in your pocket. In this article, we will explain how the life settlement process works if you want to sell your life insurance policy, the average payout of a life settlement, how taxes work, and how life settlement brokers get you more money.
How Surrendering a Life Insurance Policy Works
When you give up a life insurance policy, the insurance company may pay you some money, called the cash surrender value. This is most common in whole life or universal life policies, not term policies. You may have to pay some fees to cash in your life insurance, especially if you are doing so in the early years of your policy.
Once you surrender a policy, your coverage ends. Your insurer pays you the cash value (minus any loans you may have against it and any surrender fees). After surrender, there is no longer a death benefit for you or your beneficiaries.
It usually takes a few weeks to process your request and send the payment with the final amount determined by the rules written in your policy.
When Surrendering Is Commonly Chosen
People consider surrendering their policies for a variety of reasons, such as:
- No longer needing the coverage
- Paying the premiums has become too expensive
- Needing cash for medical expenses or living expenses
- Having a serious health condition that shortens life expectancy
However, there are choices with higher payouts, so if you are considering a life settlement vs. surrender, we’ll explain what that might mean for you.
What It Means To Sell a Life Insurance Policy
Selling a policy involves transferring ownership to a third-party buyer through a life settlement. The policy remains in force, but the buyer assumes payment of any future premiums and becomes the beneficiary. In exchange, you get a lump-sum payment and give up the death benefit.
This approach is a bit more complex than surrendering, but it can result in a higher payout for qualifying policies. Many policyholders exploring selling a life insurance policy do so because the policy’s market value may exceed what their insurer offers through surrender.
Who Typically Qualifies for a Life Settlement?
Eligibility generally depends on a combination of age, health, and the structure of your policy. Most people who sell a life insurance policy are seniors 75 years or older with policy death benefits of $100,000 or more, although younger adults may also be candidates.
What type of policies qualify? In general, whole life, universal life, variable life, survivorship, group life, and even some convertible term policies may be eligible for life settlement.
If you would like a more thorough evaluation, you can contact Life Settlement Advisors or view our Life Settlement Eligibility Guide.
Comparing Life Insurance Policy Payouts and Tax Implications
One of the biggest differences between surrendering and selling is the potential payout and how it may be taxed. Here is a quick comparison of how life settlements vs. surrenders affect payouts and taxes.
LIFE SETTLEMENT: SELLING YOUR POLICY |
SURRENDERING LIFE INSURANCE POLICY |
| Payment may exceed surrender value, depending on health and policy details. | Payment is limited to the policy’s cash surrender value. |
| More documentation and underwriting are involved. | Simpler process, usually faster. |
| Taxes can include a mix of ordinary income and capital gains. | Taxes may apply to gains above total premiums paid. |
The average life settlement payout typically exceeds the policy’s surrender value, though each policy must be examined individually.
Who you work with to sell a life insurance policy also matters. The best life settlement broker will understand that this is a big decision and work to get you more money because they have access to multiple buyers and investors, leading to average payouts exceeding $200,000.
It’s also worth considering your future needs. If you sell your policy now, getting another one later may be difficult, as insurance companies often limit coverage or charge much higher premiums as people get older.
Long-Term Impact on Coverage and Beneficiaries
Both surrendering and selling permanently eliminate your policy’s death benefit, with implications beyond immediate cash flow.
For families, it may affect legacy planning, charitable intentions, or funds intended for survivors. So, it’s a good idea to talk with your adult children, especially if they are beneficiaries. You’ll want to make sure they understand your decision and why you’re doing it to avoid hurt feelings or worries they may have.
You should also discuss your plans with estate professionals before proceeding, especially if the policy was initially purchased for long-term protection rather than liquidity.
When Does Each Option Make Sense?
If you are trying to decide whether to sell your life insurance policy or give it up, you are not alone. This is a highly personal decision, and there is no one right answer for everyone.
You should consider:
- How your age or health has changed since you first bought the policy
- Whether the premium payments have become challenging to keep up with
- When you will need access to additional funds
- How much you might receive for each option
Many people asking, “Should I sell my life insurance policy or surrender it?” are balancing peace of mind against financial value. Surrendering a policy is often simpler, while selling a policy may offer a higher payout.
Taking the time to understand your options can help you make a decision that feels right for both your finances and your peace of mind.
How To Decide and Next Steps
Before you decide, it’s important to review your policy details and understand the tax considerations. For policyholders who want a clear, unbiased explanation of their options, Life Settlement Advisors provides education and guidance to help you evaluate whether selling or surrendering a policy makes the most sense.
