- What does Selling My Life Insurance Policy Mean?
- How does Selling My Life Insurance Policy Work?
- Where to Sell My Life Insurance Policy?
- Can I Sell My Term Life Insurance Policy?
- What do You Need to Do to Sell Your Term Life Insurance Policy?
- Pros and Cons of Selling a Life Insurance Policy
- Alternatives to Selling Your Life Insurance Policy
What does Selling My Life Insurance Policy Mean?
There are many reasons people consider selling a life insurance policy. Maybe the debts are paid, the children have grown up, and you need the money for retirement. Or, perhaps you can no longer afford the premiums and want to know if there’s a way you can sell. Maybe you need a lump sum of ready cash to pay medical bills, or to finance a college education. Selling a life insurance policy is called life settlement and it’s a big business.
Life settlement usually applies to permanent life insurance policies only such as whole life or universal life insurance. In some cases, term life insurance policies can be sold too. More details below.
How does Selling My Life Insurance Policy Work?
The way it works is you find a buyer who agrees to purchase the policy. They pay what’s left of the premiums, and they get the death benefit when you die. Yes, when you die, not when they die. This means they are profiting from your death, which is an unsettling concept.
The policy must have a face value of $100,000 or higher. The Life Insurance Settlement Association (LISA) has an online questionnaire to see if you qualify.
There are online calculators to help you figure out how much you can get from selling your life insurance policies, but the average payout is 22% of the policy’s face value according to Mason Finance, although it can range from 10% to 50%. The average payout is usually more than surrender value but much less than the face value of the policy.
Where to Sell My Life Insurance Policy?
First, you need to find a buyer. You can do this yourself, but most people find it easier to use a life settlement broker. There’s even a professional organization for this, the Life Insurance Settlement Association, or LISA.
LISA says you can sell your policy through either a life settlement provider or a broker.
- Brokers solicit multiple bids on a policy to get the best price
- Providers are purchasers of life settlements
You’ll need the details of your policy and your medical records. Keep in mind that life settlement brokers work on commission, which may take a chuck of the sale.
Buyers will try to estimate how long you are likely to live before making an offer, hence the need for the medical records. Candidates for life settlements are usually older than 65. The older you are, the easier for you to sell your life insurance policy. Similarly, the healthier you are, the more difficult for you to to sell your life insurance policy.
Once you find a buyer, they start paying your premiums. They will probably check in with you every so often to confirm that you’re still alive. When you die, they get the death benefit.
Can I Sell My Term Life Insurance Policy Too?
Many people who buy term life insurance policies wonder if they can sell their policies for cash. They hear that owners of whole life and universal life policies can get cash for their policies and wonder if they can do the same thing.
Term life insurance doesn’t traditionally have a cash value component, but it may be possible to sell your term life insurance policy if it can be converted to a whole life or a universal life policy. It is much easier to sell if a term life policy is converted to a universal life policy. Whole life policy is more difficult to sell.
If you have a term insurance policy with no option to convert, you won’t be able to sell.
What do You Need to Do to Sell Your Term Life Insurance Policy?
You will need to check to see if your term insurance policy has a conversion option on it. If it does, contact your insurance company or your agent or advisor to convert your term life policy to, preferably, a guaranteed universal insurance or indexed universal insurance policy. You can convert it to a variable universal life insurance or whole life policy too, however, it will be more difficult to sell. After that, contact a life settlement company or broker to sell the new permanent life insurance policy.
If it doesn’t, see if it has any riders that you could take advantage of, such as:
- Accelerated death benefit: This allows you to take a portion of your policy if you were diagnosed with a terminal illness
- Long-term care rider: This helps pay expenses associated with long term care.
Even if you can’t sell the policy, you may be able to access some cash to help with medical costs.
Pros and Cons of Selling a Life Insurance Policy
Pros:
- You get a lump sum of cash
- You can use the money for medical costs, to fund retirement, or pay for college for your kids
- If the policy was about to lapse and you can’t afford the premiums, selling gives you some resources
- You no longer need to pay premiums
Cons
- Your heirs will not get a death benefit
- The money you receive will be taxed as either income, capital gains, or a combination
- If you are in good health, it will be extremely difficult to find a buyer
- If you sell with a brokerage firm, commissions are as high as 30%
- Getting a lump sum payment may affect your ability to qualify for Medicaid
- Financial Industry Regulatory Authority warns that the life settlement industry is prone to abuse and aggressive sales tactics.
Alternatives to Selling Your Life Insurance Policy
If you are considering selling your policy because you need quick cash for medical expenses, see if your life insurance policy has any applicable riders you can take advantage of. Riders that be beneficial are:
- Accelerated death rider
- Long term care rider
Other options include:
- Keep the policy and pay the premiums with a loan
- Explain to your heirs you can no longer afford the premiums and see if they can help
Last Thoughts
If you are considering selling a life insurance policy for cash, it might be a good idea to talk to a financial advisor. They can help you weigh your options and figure out if life settlement is the best move for you. Also consider talking to your heirs/dependents, so they know not to expect a death benefit.