Did you know you can sell all or a portion of a life insurance policy, even term insurance?
(3 minute read)
There are many complicated factors that go into deciding if selling your life insurance policy is the right decision for you and your family. In this article we will go through some of the pros and cons of selling a life insurance policy as we explore the question “Is selling your life insurance policy a good idea?”
Why Would Someone Cash Out a Life Insurance Policy?
The sale of a life insurance policy to a third party (also known as a life settlement) is a financial decision, and it can be made for many different reasons. Some of these are:
Changes in Financial Needs Over Time
Life insurance policies are often taken out by someone when they are young and might have had dependents or different financial concerns. As they become older, no longer have dependents, or have very different financial assets, they might find their original policy no longer serves them.
Desire to Reduce or Eliminate Monthly Premiums
Some people with life insurance policies get to a point that they no longer want to or are no longer able to pay the monthly premium for their policy. Selling their policy will likely get them a much larger cash payment than simply surrendering it, or by not paying the premiums and getting none of the value back.
Need for Cash Now
There are many situations that might require a large influx of cash to someone’s budget. A life insurance policy is a financial asset and selling it can generate liquid capital to use for unexpected expenses such as medical bills or major home repairs.
A life insurance policy is something that a person paid money into for many years. Selling the policy may allow them to choose to use that money toward something they will really enjoy. This may include travel, moving to a new home, taking a big family vacation, or a myriad of other activities of their choice.
When Should You Cash Out a Whole Life Insurance Policy?
The short answer is, when you’re old enough and have been paying into it for long enough for it to have accrued substantial value. In most cases, you need to be over 65 before you would be eligible for a life settlement, but you will often get a larger cash payment if you are even older. There are cases where younger people are able to sell policies, but these are typically only when they have a health condition that dramatically shortens their life expectancy, as in viatical settlements.
Additionally, selling your life insurance policy generally only makes sense if it is over $100,000. Lower-value policies typically aren’t going to be able to be sold for more than the cost of the fees associated with selling them, and they generally aren’t sold as life settlements.
A whole life insurance policy is just one type of life insurance, although often the one people think about as the traditional life insurance. But the same considerations we discuss here also apply to other types of permanent or term life insurance as well.
What Is the Downside of Selling Your Life Insurance Policy?
When making any big financial decisions, it is important to look at the downsides as well as the benefits. The potential downsides that could come with the decision to cash out a life insurance policy are:
- No death benefits – When you pass, there will be no payment going to your family or dependents. If this death payment is why you signed up for life insurance to begin with and it is still necessary, selling your policy may not be the right choice for you.
- Tax Ramifications – We’ll get more into the details of the tax consequences in the next section, but it is important that you understand how this sale will affect your tax bill.
- Ineligibility for some public assistance programs – A large cash payment from the sale of your life insurance policy may make you ineligible for Medicaid or other public assistance programs you may rely on. Make sure you understand what eligibility changes may occur.
- May not be exempt from creditors – Depending on the situation, the money earned through the sale of your life insurance policy may be accessed by creditors or debt collectors.
Discussing all your options with an advisor with experience in life settlements (like us at Life Settlement Advisors) can help you understand how much your policy is worth and make it easier to understand if any of these downsides would apply to you.
What Are the Tax Consequences of Cashing in a Life Insurance Policy?
Selling your life insurance plan will result in a large lump sum payment, and it may have tax consequences. There are situations where the decision to sell a policy may either increase or decrease your tax bill, so it is important to consult a professional about your exact situation to avoid any surprises.
In general, though, the amount you paid into your policy as premiums will not be taxed, since it was your money to begin with. So if you paid $100/month for 100 months (about 8 years), you would have paid $10,000 worth of premiums. If you sell your policy for $10,000, it is unlikely there will be any taxes owed on that money, since it was your post-tax money that you paid in. If you sold that same policy for $20,000, after paying $10,000 into it, the additional $10,000 “profit” you made beyond what you paid in is likely to be taxed.
We’re commonly asked “is cashing in a life insurance policy considered income?” and the answer is usually not. In our example above, the $10,000 “profit” is normally considered long term capital gains, and not taxed in the same way as earned income. The exact tax rate and filing of the money from the sale of a life insurance policy will be different for everyone, though, so please consult your CPA or tax professional.
Life Settlement Advisors: Getting You What You Deserve
Instead of surrendering the policies that just don’t make sense any longer, you can sell the policies for a lump payout that will let you see the benefit of the life insurance policy immediately. Here at Life Settlement Advisors, we’ll walk through the process with you so you will know the value of your policies before you even need to commit to a sale. Get a free consultation on our website today and see if selling your life insurance policy is the right decision for you.
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.
Life Settlement Advisors