No matter the reason, if you’re thinking of selling your life insurance policy, you have options. Make sure you know how the process works, what’s at stake, and how to make choices that you won’t regret down the line.
How Does Selling a Life Insurance Policy Work?
Just like when you first bought your life insurance policy, when you decide to sell it you enter into a legal contract. You agree to sell the full deal to a third party, and the death benefit that comes with it, in exchange for funds that you both agree to. To be clear, when you sell your policy, you give up all the rights and future payouts that came with it. Once the deal is complete, the buyer then takes over any premium payments and becomes the beneficiary of the death benefit. Former names are erased. There are a few other terms for this process, so when you sell your policy you may hear it called a “life settlement” or a “viatical settlement.” The latter occurs when the seller has a terminal illness or a life expectancy under two years.
Ways to Get Money From a Life Policy Before Death
If you don’t wish to sell your policy to a third party buyer, there are a few ways to get money from it while you’re still alive:
Five Reasons to Sell Your Life Insurance Policy
Before you decide to take a settlement, it’s wise to get the help of an expert in this field, and perhaps involve your financial advisor and/or accountant. Here are some cases in which selling your life insurance policy might be a good idea: These are general examples and each situation is unique. If you are having health trouble or have become gravely ill and you don’t have a plan in place to protect your loved ones, losing life insurance can have drastic effects. Make sure you are aware of the outcome of each option fully before taking any action, and get professional advice if you need help. It’s worth the extra work or cost up front if it means you can avoid making a choice you might regret.
How Much Can You Get In a Life Insurance Settlement?
As the policyholder, you can expect to receive about 20% to 25% of the amount that would be paid out when you die, though this figure will vary. The exact amount you’ll receive in cash back when you settle depends on a wide range of factors, such as:
The death benefit value of the policyYour ageThe cost and amount of time that remains to pay premiums
Many companies will have limits in place before they’ll even think about making a deal. For instance, some restrict the process to people over the age of 65. You’ll be asked to apply through a formal process before they approve you outright. Then they’ll use the factors listed above (and maybe more) to land on a price that still makes them a profit. The amount of money the seller gets should be more than the cash surrender value of the policy and will be less than the death benefit value of the policy.
How to Sell a Life Insurance Policy
As you might imagine, selling life insurance to a third party is part of a highly regulated industry, and therefore it can be a very complex process. Even though you could try to find a buyer on your own, the safest and most efficient way is to work with professionals in the field. These may include:
A professional advisorA life settlement broker who can provide you with counsel, and search for buyers on your behalfA life settlement provider
Once you have a buyer, you’ll need to have the following information ready:
The type of life insurance policy you have; if you have term life insurance, you may also want to find out if you can convert it to a universal life or whole life policy Personal information such as your health and medical history, and any other facts that may speak to the value of your policy The cash surrender value of the policy How many years premiums will have to be paid for
Before You Sell Your Life Insurance Policy
There are some extra precautions to take before you sell your policy. First, request an in-force illustration or reprojection from your current provider. This is a formal document that uses the current status of your policy (cash value, benefit amount, and any loan balance) to project its future value. Having this knowledge will help you gauge how much it might be worth to someone who wants to invest in it. It can also help you weigh your options if something on your end has changed. You should also shop around to get the best price; if you don’t feel good about the deal, and think you may be able to secure a better offer, hold off until you get proper advice. The Life Insurance Settlement Organization (LISA) is a non-profit resource that may be able to help you. Look into how the sale might affect your taxes too. For instance, selling your life insurance policy may cause you to have to pay capital gains. If the money you get from selling your policy changes your income bracket, it may affect your ability to qualify for government programs or subsidies, such as Medicaid. Selling your life insurance policy may also incur fees. Review offers from several buyers or life settlement brokers and compare what costs will be involved. If you are looking to take a settlement in order to finance something specific, beware that if you have debts, your creditor may be able to come after these funds. This will take priority over anything you have planned to use the funds for on your own. Make sure you’re aware of all the ways that could work.
