What Is the Downside of Selling Your Life Insurance Policy?

Did you know you can sell all or a portion of a life insurance policy, even term insurance?

(3 minute read)

If you’re looking for ways to pay off debt, relieve yourself from costly premiums, or fund your bucket list adventures, you may be asking, “Can I sell my life insurance policy for cash?” Selling a life insurance policy can be an appealing option to exchange an unwanted policy for cash. 

This post will cover what exactly a life settlement is, the pros and cons of selling a life insurance policy, and how to know if a life settlement is right for you.

What Does It Mean to Sell Your Life Insurance Policy?

When you sell your life insurance policy, you receive a cash lump sum in exchange for the rights to your death benefit payout (and the responsibility of paying the policy’s premiums). Most transactions are handled by life settlement brokers, who work with the policy holder to sell all or a portion of their policy to a buyer, who is typically an individual or institutional investor.

Who Can Sell Their Life Insurance Policy?

You must meet the following qualifications to be eligible to sell your life insurance policy through a life settlement:

  • Age: You must be at least 65 years old in order to sell your life insurance policy, but ideal candidates are typically at least 70.
  • Health: You must have experienced a change in health since you were issued your policy, and your current life expectancy must be less than 15 years.
  • Policy Age: You can only sell your life insurance policy if you have held it for at least 2 years.  
  • Benefit Payout: The payout of your death benefit must be at least $100,000.

Given extraordinary circumstances, it is possible for someone younger than 65 to sell their life insurance by opting for a viatical settlement. Viatical settlements are designed to accommodate patients who were diagnosed with a terminal illness. To qualify, that patient must have a life expectancy of 2 years or less  caused by that terminal diagnosis. There is no age restriction for a viatical settlement, but the policy benefit payout must still be at least $100,000, and the policy must be active for at least 2 years before it can be sold. Due to their unique circumstances, only specialists handle viatical settlements. 

How Much Can I Sell My Life Insurance Policy For?

Policy sellers can typically expect a return of 20% of their death benefit. So, if your policy’s payout is $100,000, you would receive a lump sum of about $20,000. At first, it may seem like you’re losing a lot of money. But, when you compare the return of a life settlement to that of surrendering your policy or letting it lapse, the advantages are clear. The average surrender has a return of only $460 per $100,000, and letting your policy lapse leaves you with nothing.   

On top of the value of your death benefit, other factors like lifestyle, premium costs, and loans against your policy determine how much it can sell for. To see how much your life policy could be worth, and to see if you qualify for a life settlement, use our free life settlement calculator.

Is It a Good Idea to Sell Your Life Insurance Policy?

While it can often be advantageous to sell your life insurance policy, there are also potential downsides. You should be aware of how your beneficiaries will be affected and what a life settlement’s tax implications are.

Do My Beneficiaries Still Have Any Claim to My Benefit Payout?

No, when you sell your life insurance policy, the buyer receives the rights to your death benefit payout. In certain situations, it may be critical that your beneficiaries retain access to some amount of payout. In those cases, you can opt to sell only a portion of your policy. You’ll still get cash now, and your beneficiaries will still receive a payout later, although it will be reduced. In other cases, you may discover that your loved ones don’t actually need to rely on the payout from your policy. This can often be the case for parents whose kids are out of the house with established careers. 

While forfeiting your beneficiaries’ claim to your payout can seem like a major downside to a life settlement, it is worth having a conversation with your loved ones to see if they would need the benefit or if a portion of that benefit would also be suitable.    

Do I Have to Pay Taxes If I Sell My Life Insurance Policy?

Yes, as long as the amount that you earn from the sale is more than the total amount of premiums you’ve paid over the life of the policy. Life settlements can be subject to either income tax, capital gains tax, or a combination of both. Still, when dealing with an unwanted policy, life settlements have a much higher average return than surrendering your policy or letting it lapse, making up for the additional taxes. 

While navigating the tax liabilities that come with a life settlement can be discouraging, working with a tax professional or financial advisor can make the process easier and ensure that you are in line with the most recent tax laws.

Make the Most Informed Decision with Life Settlement Advisors

Like most major decisions, choosing whether or not to sell your policy through a life settlement means weighing the benefits against the downsides. With the help of a trusted advisor, you can make sure that you are considering all of your options and how they will affect you and your loved ones. At Life Settlement Advisors, we guide you through every step of the decision making process, from finding out if you qualify to finding the buyers that will offer you the most for your policy.

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

Get in touch with Life Settlement Advisors today to take the first step toward converting your policy into cash.
Life Settlement Advisors
Leo LaGrotte
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.