The usefulness of a life insurance policy can change as your life circumstances shift. Some older adults find they no longer need a policy they bought in a different, earlier stage of life. Their beneficiaries are financially independent and no longer need the policy’s benefit, or they have enough saved and prefer not to keep paying premiums.
Seniors at this stage often ask whether they should sell their life insurance policy or surrender it for cash. Surrendering is simple, but selling can earn you a higher premium. Because the buyer would own your policy, including the death benefit, they typically pay more than the surrender value.
To sell your life insurance policy, one of two things must be true: Either you’re 65 or older with a policy value of at least $100,000, or your health has declined significantly since you took out the policy.
What It Means to Surrender vs. Sell a Life Insurance Policy
To surrender a policy, you cancel it with your insurer and receive the cash surrender value, typically equal to your paid premiums plus any interest. You may owe income tax on that interest, since it’s in addition to what you paid for coverage. Your insurer may also charge a service fee to cancel your coverage.
Selling the policy is a completely different process. Instead of relinquishing your policy to the original insurer, you sell it to a third party via a life settlement. The buyer agrees to assume ownership of your policy, including responsibility for remaining premiums. In exchange, they become beneficiaries and will receive your death benefit.
Unlike surrenders, which most policyholders arrange through their insurers, most settlements are handled by brokers. A broker can shop your policy around to secure the best possible offer, whereas there’s no negotiation in a surrender.
Because selling your policy requires searching for and negotiating with a buyer, it can take a bit longer than a surrender. A life settlement also requires you to meet certain eligibility criteria, which are generally stricter than those for surrenders.
Eligibility Requirements for Each Option
Is it legal to sell your life insurance policy?
Most of the time, yes, if you meet the settlement criteria. These include:
- Age: You typically need to be 65 or older to sell a life insurance policy. There are some exceptions available for younger policyholders with terminal illnesses.
- Health status: A settlement may be possible if you’ve experienced a change in your health status since buying the policy. Most age-eligible candidates have a chronic medical condition and a life expectancy of less than 15 years, while younger eligible sellers have a life expectancy of less than 24 months.
- Policy type: In general, you must have permanent life insurance to be eligible for settlement, but there is a potential workaround. If you have a convertible term policy, you may be able to convert it and then sell it after conversion.
- Face value: Most buyers want your policy to have a face value of at least $100,000, but lower-value policies may attract interest if premiums are also low. In some cases, your premium costs must be less than 5% of your policy’s value, even if the value exceeds $100,000.
- Ownership duration: States have different rules for when you can sell a life insurance policy. Most require you to pay 25 months of premiums before offering your policy for sale.
If you think you might qualify, your next step is to approach a broker about selling your life insurance policy.
Surrendering a policy is much easier to qualify for than a life settlement, provided you have permanent and not term life insurance. Term policies are valid for a limited period and do not build cash value, so they’re not eligible for a policy surrender. If you have a permanent life insurance policy with cash value, most insurers will give you the option to surrender.
Comparing Payout Amounts and Financial Outcomes
Another common question is, “How much for my life insurance policy?” As you might expect, the answer depends on your chosen process. Surrender value is usually the policy’s cash value minus any fees and outstanding loan amounts. The latter only applies if you’ve borrowed against your policy.
Settlement amounts depend entirely on what buyers are willing to offer. Buyers arrive at that number by considering your death benefit, premium costs, life expectancy, and age.
According to the Life Insurance Settlement Association, the average selling price is 6.5 times a policy’s surrender value. Your total may vary slightly depending on how the buyer calculates their potential profit versus cost.
Either option is a financial trade-off. A surrender means a loss of the death benefit in exchange for a modest but quick cash influx. A sale typically leaves you with an amount much closer to your death benefit, but it goes to you instead of your beneficiaries. That may impact the inheritance you can leave.
Tax Implications, Timelines, and Process Differences
If you’re eligible for a settlement, your next question is probably, “Is it a good idea to sell my life insurance policy?”
The right answer depends on your goals and financial needs. Selling or surrendering your policy means you relinquish coverage, and your beneficiaries won’t get the death benefit. If you sell, you can have cash in your pocket sooner.
Most policyholders wait around 90 days to obtain a settlement payout. Surrendering is a shorter timeline because the process is more straightforward. Expect paperwork from the insurance company and a short wait while the company processes it.
The settlement process involves more steps and third parties. Here’s how it works:
- 1. Submit your policy to a broker for review.
- 2. The broker shops your policy around to potential buyers.
- 3. The broker collects offers and presents them to you for review.
- 4. If you accept an offer, the broker will guide you through the closing process.
If you accept an offer and sell your policy, you’ll be responsible for taxes above what you’ve paid for the policy. The same tax rules apply for a surrender, but a typically lower payout means less tax responsibility.
Choosing the Option That Fits Your Financial Goals
If you like the idea of a larger payout and don’t mind a slightly longer potential wait, then your next question should be, “How do I sell my life insurance policy?”
As seller’s brokers, we can help you navigate the process of converting your policy into cash. Get in touch with Life Settlement Advisors today and learn what selling a life insurance policy can do for your retirement.
