From Coverage to Cash: Selling Your Life Insurance Policy

Picture yourself in a moment of financial strain, surrounded by mounting debts and uncertainty. As you sit at your desk, staring at your life insurance policy, an inevitable question arises: Can this policy be the solution to your current predicament?

Selling a life insurance policy, also known as a life settlement, is a practice that has gained popularity in recent years — It gives you access to a large sum of cash for your needs. While this practice may not be as common as traditional policy ownership, it has become a viable option for many individuals looking to ease their financial burden. 

So how exactly does it work? In this article, we will delve into everything you need to know about selling a life policy. We’ll discuss its implications and provide guidance on where and how to sell it for maximum returns.

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    Can I sell my life insurance policy?

    Selling a life policy is different from surrendering or canceling it. Surrendering a policy involves terminating it without receiving any payout. Selling it, on the other hand, allows you to receive a cash payment while relinquishing future ownership and death benefit rights.

    When you sell a life insurance policy, you transfer the ownership and rights of your policy to a third party, often a life settlement provider or an investor. In return, you receive a lump sum payment, typically less than the policy’s face value but more than its current cash surrender value.

    The buyer of the policy then becomes the new policyholder and assumes responsibility for paying future premiums. They will also receive the policy’s death benefit when the insured person passes away. 

    Two common avenues for selling policies are life settlements and viatical settlements.

    Life settlement

    A life settlement refers to the process of selling a life insurance policy to a third-party purchaser in exchange for a lump sum payment. Unlike surrendering the policy to the insurance company, a life settlement often yields a larger payout.

    In life settlement, any policyholder who meets the eligibility criteria such as policy age, minimum face value, and so on, quaify to sell their policy. Most of the time, the insured owner is healthy.

    Viatical settlement

    On the other hand, Viatical settlement is specifically designed for policy holders who are sick or terminally ill. This settlement allow individuals to sell their life insurance policy to a third party in exchange for an immediate sum of money.

    It provides financial relief for policyholders facing the challenges of escalating medical costs and other expenses related to their condition. The eligibility criteria for viatical settlements may differ from those of life settlements and often center on medical certification.

    Both life settlements and viatical settlements are subject to legal and regulatory frameworks to protect policyholders. These frameworks vary by jurisdiction, and it is vital to consider these options to understand the specific requirements in your state or region. 

    Reasons why people sell life insurance policies

    Your life insurance policy, once purchased to protect your loved ones, can serve as a valuable financial asset. However, there are circumstances when selling your life insurance policy becomes an attractive option.

    Financial Flexibility

    We all experience tough financial times at some point. Selling your life insurance policy can offer a significant lifeline when you find yourself grappling with mounting medical bills, mortgage payments, or unforeseen expenses. Rather than waiting for the policy to reach maturity, opting to sell it allows you to receive a lump sum payment that can provide essential assistance during these difficult times.

    Changing Needs

    Life is unpredictable, and financial circumstances may evolve over time. As your needs shift, the life insurance policy you once relied upon might no longer align with your current situation. Perhaps your children have grown up and become financially independent, or you’ve paid off significant debts. By selling your life insurance policy, you can redirect those funds towards more pressing financial priorities or acquire a different policy that better suits your current needs.

    Premium Relief

    As you age, the cost of maintaining an active life insurance policy can become increasingly challenging to manage. Selling your policy can help alleviate the burden of hefty premium payments and avoid the risk of lapsing due to non-payment. By parting with your policy, you gain immediate cash rather than continuing to drain your resources with premiums that strain your budget.

    Retirement Boost

    Your life insurance policy gradually builds cash value over time, providing a potential nest egg for retirement. Selling your policy as part of your retirement planning strategy can unlock this accumulated value, giving you a financial boost as you enter your golden years. The funds obtained can supplement retirement income, finance travel plans, or fulfill long-held dreams.

    Terminal Illness Support

    When facing a terminal illness, selling your life insurance policy can provide tangible relief during such a challenging time. Accessing the funds from the policy’s sale allows you to obtain crucial medical treatments, access end-of-life care, or simply enhance your remaining days, ensuring you make the most out of the time you have.

    Read Also: Is Life Insurance Worth It?

    How much can I get from selling my policy?

    While there is no single answer to how much you can earn from selling your policy, there are certain factors you should look out for to ensure you get the best offers.

    Factors influencing your payout

    1. Policy Type: The type of policy you hold can impact the offers you receive. Permanent life insurance policies, such as whole life or universal life, build cash value over time. These policies often have higher potential payouts as they have an accumulated cash value component.

      On the other hand, term life insurance policies, which provide coverage for a specific period, typically do not accumulate cash value and may have a lower market value when sold. Other details such as any additional riders or benefits attached to the policy can impact its market value.
    1. Face Value: The face value, also known as the death benefit, is the amount of coverage your life insurance policy offers. Generally, policies with higher face values will have the potential for higher payouts when sold. Investors typically look for policies with substantial death benefits as they seek to secure a valuable asset and maximize their potential returns.
    1. Age and Health: The insured’s age and health significantly affects the value of the life insurance policy. Usually, younger and healthier policyholders have policies with higher market value. This makes the policy attractive to buyers due to the longer periods of premium payments and potential growth.
    1. Premium Payments: The total amount of premiums you have paid into the policy can influence its market value. Policies with a longer payment history and consistent premium payments are often viewed more favorably by investors.

      The idea is that a longer payment history represents a greater investment on your part, making the policy more attractive to buyers. Policies with a shorter payment period or sporadic premium payments may receive lower offers.
    1. Cash Value: If your policy has accumulated cash value over time, it can significantly impact the potential payout. With each passing year, part of the premiums you pay towards your policy gradually builds up as cash value – comparable to how money accumulates in a savings account.

      Investors often find policies that boast substantial cash values enticing because they can yield an instant return on investment. As the amount of accumulated cash value grows, it also amplifies the market worth of your policy and expands opportunities for a more generous payout.

    Read Also: Which Type of Life Insurance Policy Generates Immediate Cash Value?

    1. Market Conditions and Investor Demand: The state of the secondary life insurance market and the overall demand from investors can influence the purchase price of a life insurance policy. Factors such as market interest rates, overall investment environment, and investor preferences can all impact the offers you receive when selling your policy.
    2. Insurance Company Ratings: The financial stability and ratings of the insurance company that issued the policy can also affect its market value. Buyers generally prefer policies issued by well-established insurance companies with strong financial standing and high credit ratings.

    Tax Implications

    Before selling a life insurance policy, you need to determine whether it is a term life or permanent life insurance policy.

    If selling a term life insurance policy, your proceeds would not be subjected to income tax as long as it is not more than the premiums you’ve paid into the policy. This is because term life insurance is primarily focused on providing pure protection coverage without any cash value involved. However, if you choose to sell a permanent life insurance policy, the proceeds from the sale might be subject to taxation under different circumstances. 

    Firstly, let’s consider the basis of the policy. The portion of the proceeds that represents the premiums you paid for the policy is typically viewed as a tax-free recovery of your investment and isn’t subject to income tax. Secondly, we have to take into account any cash value that exceeds the cost basis of the policy — usually this excess amount would be considered taxable income. 

    Lastly, if your policy is classified as an investment vehicle, any gains realized from selling it might be subject to capital gains tax. The specific tax rate applied would depend on how long you owned the policy and which income tax bracket you fall under. 

    Read Also: Is Life Insurance Taxable – What Are the Cases in Which Life Insurance Is Taxed?

    Who buys a life insurance policy

    Life Settlement Companies 

    These companies specialize in purchasing life insurance policies from individuals. They evaluate factors like your age, health condition, and policy details to determine the value of your policy. If they’re interested, they’ll make an offer to buy it from you. If you accept, they become the new owners and beneficiaries, taking over the premium payments and receiving the death benefit when the time comes.

    To get in touch with life settlement companies, you can start by researching reputable companies in your area or even consider reaching out to life settlement brokers who can connect you with potential buyers. They can assist in negotiating offers and guiding you through the selling process.

    Institutional Investors

    Think big banks or investment firms. Sometimes these organizations are interested in purchasing life insurance policies as financial assets. They view your policy as an investment opportunity, considering potential returns.

    Connecting with institutional investors can be more difficult because they frequently work through intermediaries such as brokers or financial advisors. Try reaching out to financial professionals who have experience in the life settlement market. They can help you explore institutional investor options and facilitate the communication and negotiation process.

    Policy Brokers or Agents 

    If you prefer some guidance and assistance throughout the selling process, policy brokers or agents specializing in life settlements can be valuable resources. They have connections with various buyers, including life settlement companies and institutional investors. Brokers can assess the market value of your policy, negotiate with potential buyers on your behalf, and help you secure the best possible deal.

    Partnering with a reputable broker can simplify the selling process. You can find reputable brokers by conducting online searches, asking for recommendations, or seeking referrals from financial advisors. They often work on a commission basis, receiving a percentage of the final sale price.

    How does selling a life insurance work?

    The process of selling a life policy is intricate and demands thoughtful deliberation primarily because of its potential financial and legal consequences. Unfortunately, It is not uncommon to witness individuals falling prey to committing insurance fraud when due processes are not followed.

    Such actions undermine the credibility of the insurance industry and also exposes innocent individuals to potential legal repercussions.

    Therefore, it is crucial for individuals to thoroughly understand the terms and conditions of their life insurance policy as well as the selling process and requirements.

    Eligibility requirements

    1. Policy Age: Most buyers require that the policy has been in force for a certain period, commonly two years or more. This waiting period helps ensure that the policyholder’s intent is genuine and reduces the risk of fraudulent activities. If your policy has been in force for a significant period, you’re more likely to qualify.
    1. Policy Type: Typically, permanent life insurance policies like whole life, variable life, universal life, or convertible term life insurance policies are eligible for sale. Term life insurance policies usually do not have a cash value component and are not suitable for selling. However, different policy types come with their own eligibility criteria and some buyers may accept term life insurance policies. It’s essential to check the specific criteria for the policy type you hold.
    1. Policyholder’s Age: Depending on the institution or market, there may be specific age requirements for selling a life insurance policy. Some companies require policyholders to be a certain age, such as 65 or older, to qualify.
    1. Health Condition: Individuals who are older or have health conditions that could lead to a shorter life expectancy often have more valuable policies. So although policyholders in various health conditions may be eligible to sell their policies, buyers generally assess the health of the policyholder to evaluate risks and determine the value of your policy.

    Where to sell your life insurance policy

    1. Life Settlement Companies: These companies specialize in purchasing life insurance policies from policyholders. They evaluate your policy’s value and offer you a lump sum payment — typically higher than the policy’s cash surrender value — in exchange for transferring the policy to them. Some of these companies are Coventry and Magna Life Settlements.
    1. Insurance Brokers: Insurance brokers can help facilitate the sale of your policy by connecting you with potential investors or life settlement companies. They have access to a network of buyers who are interested in purchasing life insurance policies.
    1. Online Marketplaces: There are online platforms and marketplaces specifically designed for selling life insurance policies. These platforms allow you to list your policy and attract potential buyers who are actively seeking life insurance policies.

      They often provide tools for policy valuation and offer a secure platform for transactions. Some popular online marketplaces for selling life insurance policies include Policygenius, LeapLife, and Welcome Funds.
    2. Auction Platforms: Auction platforms are emerging as a niche market for selling life insurance policies. These platforms host auctions where potential buyers place bids on policies they are interested in. This setup can create a competitive environment and potentially result in a higher price for your policy. One example of an auction platform for life insurance policies is Harbor Life Brokerage.

    The selling process

    1. Evaluation: The first step is to assess your life insurance policy and determine its potential value. This involves gathering information about the policy, including its face value, premium payments made, current cash value (if applicable), and your health condition. Life settlement companies, brokers, and investors will evaluate these details to determine if they are interested in purchasing the policy.
    1. Market Research and Offers: Once you have gathered the necessary information, you can explore potential buyers for your policy. You can reach out to life settlement companies, institutional investors, or work with a policy broker or agent who specializes in life settlements. They will help you understand the market value of your policy and present it to potential buyers to seek offers.
    1. Underwriting: If a potential buyer shows interest, they may engage in an underwriting process. This typically involves a review of your medical records, health condition, and other relevant factors to assess the risk associated with providing an offer for your policy. The underwriting process helps the buyer understand the potential liability they would assume.
    1. Offers and Negotiation: After the evaluation and underwriting processes, potential buyers will make offers for your policy. It’s important to carefully review and compare these offers. You may consider seeking advice from a financial advisor or attorney to ensure you understand the terms, any associated costs, and the impact on your beneficiaries.
    1. Acceptance and Sale: Once you have received and evaluated the offers, you can decide whether to accept or negotiate terms. If you accept an offer, you will enter into a contract to sell your life insurance policy to the chosen buyer. The buyer will take over the premium payments and become the new owner and beneficiary of the policy. Upon your passing, they will receive the death benefit.
    1. Legal and Administrative Process: Completing the sale involves fulfilling legal and administrative requirements. This may include signing transfer documents, providing necessary paperwork, and adhering to any regulations or laws related to life settlements in your jurisdiction. Working with professionals like legal advisors or settlement brokers can help ensure a smooth and compliant process.

    Alternatives to selling a life insurance policy

    Selling your life insurance policy means you totally forfeit it and its benefits — you can’t get it back. Under some circumstances, the decision could even affect your eligibility for a new policy. If you’re in need of cash for the moment, there are other ways to get money from your policy than giving it up.

    Policy Loans

    If the policy has a cash value component, policyholders may have the option to borrow against the policy’s cash value through a policy loan. Policy loans typically have lower interest rates compared to traditional loans. However, it’s important to remember that any outstanding loans at the time of the insured’s death may reduce the death benefit paid out to beneficiaries.

    Accelerated Death Benefit

    Some life insurance policies offer an accelerated death benefit (ADB) rider. This allows policyholders to access a portion of their death benefit if they are diagnosed with a qualifying terminal or critical illness. The funds obtained through the ADB can help cover medical expenses or other financial obligations without the need to sell the entire policy.

    Conversion Options

    Convertible life insurance policies give policyholders the choice to convert their existing policy into a permanent life insurance policy without the need for a medical exam. This conversion can provide additional flexibility and coverage options, which may better align with changing needs. It’s important to review the policy’s terms and conditions to determine if conversion is available and what restrictions may apply.

    Policy Lapse Management

    If financial constraints make it difficult to maintain premium payments, policyholders can explore options to manage the policy lapse. This may include utilizing automatic premium loan provisions, where unpaid premiums are covered by an automatic loan against the policy’s cash value.

    Another option is reducing the policy’s death benefit to reduce premium obligations while maintaining some coverage.

    Read Also: Accelerated Death Benefit: How Does It Work?

    Maximize your life insurance policy

    Selling your life insurance policy can offer you a valuable opportunity to access a significant sum of money that can address your financial needs and goals. However, there are ways to become financially independent through that same policy. With infinite banking, you can use your policy to finance your needs without having to give it up.