December 22, 2018
Is Selling Your Life Insurance Policy a Good Idea?
Can I sell my life insurance policy? In recent years, the possibility of selling a life insurance policy as a means of raising funds has become increasingly popular with policyholders. In fact, an entire industry called ‘Life Settlements’ has sprung up around this practice, providing an alternative to surrendering a policy back to the life insurance company or lapsing the policy.
Life settlement companies purchase your life insurance policy for an amount greater than the cash surrender value but less than the death benefit (also referred to as face value). The policyholder receives a lump sum payment.
What are the eligibility requirements? All types of policies are eligible for a life settlement or viatical settlement (for a review of the differences of a life settlement and viatical settlement, refer to this article), including term life insurance, universal life insurance, variable life insurance, and whole life insurance.
There are undoubtedly a good number of reasons to sell a life insurance policy. Most of the reasons are related to changing life circumstances for the policyholder. A list of the most common reasons for selling a life insurance policy are outlined below. There are some important things to consider before exploring the sale of a life insurance policy.
Until a policy actually changes hands, you should not allow the policy to lapse by missing the payment of any premiums which are due. Check to see if you have cash value in the policy that can be used to cover the premium payments. Regardless of what stage your negotiations are in with a buyer, all premiums must be paid, and the policy kept current. If not, your policy sale will more than likely fall apart, or, in the best case, delay it.
Failure to keep premiums paid on time can either reduce the value of the policy and your payout, or completely eliminate any dollar value which existed in the policy. It is ok to reduce your policy’s cash value and even if it might impact the payout slightly, it makes more sense than paying money into a policy that you no longer want, need, or can afford.
Timing Of A Life Settlement Transaction
It’s important to consider the timing of a life settlement transaction for a couple of reasons. First of all, you’re probably considering selling your life insurance coverage in the first place because of a life change you have undergone, or are about to undergo. Be aware that a life settlement transaction can take weeks if not months to arrange, and in order to help manage the life change you’re involved with, the timing of your policy sale will have to be coordinated pretty closely.
Potential buyers of policies will also be interested in timing, from the standpoint of having greater interest in ‘clean’ policies with no attachments or provisos, which can be moved forward quickly, so their money isn’t tied up for long periods.
Set Realistic Expectations
By setting realistic expectations, you can remove much of the emotion which might otherwise accompany a life settlement transaction, and that will be very much to your advantage. Take your time, and give some thought to opportunity costs, sunk costs, replacement products, and the tax implications that will result from the sale of your life insurance policy.
There is no guarantee that the value of your life insurance policy today will be the same in two years or five years, so you should expect a ‘diminishing returns’ scenario as time goes by. Remember, your payout is going to be dependent on your life expectancy (after a review of your medical records) and how your life insurance policy works (the premiums and amount of coverage).
When going through the underwriting process for a life settlement transaction, the life settlement provider will probably pose a number of questions to the policy owner, and these all need to be truthfully answered, or the buyer will probably abandon the deal. The life settlement company endeavors to learn important information about the policy during this process to determine its suitability for purchase.
Any buyer of a policy would want to know whether there has ever been a policy loan against it, or whether the policy has ever changed hands. If you don’t fully disclose all information requested of you on an application form, any offer you get will likely be drastically under-valued, or you may get no offers at all. The other risk is that during the sale process, these facts come to light and your offer is canceled or the price is changed.
Make Sure To Engage The Services Of A Licensed Broker Or Provider
If you are seriously thinking of selling your life insurance policy, be sure to retain a licensed life settlement broker or provider. State licensing requirements ensure that you are protected as a policy seller. A licensed life settlement company is regulated by the state which issued the license and assures the seller that the company’s principals, policies, and procedures have all been vetted. And in the case of licensed life settlement providers, regulators have reviewed and approved all closing documents to transact the sale of your policy.
Some states have more stringent regulations than others, Florida for example has the most thorough licensing process. There are fewer licensed life settlement providers in Florida as a result, and those providers can be viewed to have completed a more thorough licensing review, and thus be a more credible company to work with.
A great resource in addition to our site is the Life Insurance Settlement Association (LISA) website, the life settlement industry’s largest and most important trade association. On the LISA website, you can even find a list of brokers and providers on their site and see where those companies are licensed.
Accelerated Death Benefit
If you or the policy insured has a chronic or terminal illness, you should check to see if you are eligible for an accelerated death benefit. You should compare the value of your policy with the accelerated death benefit option, if available. An accelerated death benefit pays out a percentage (typically up to 50%) of the policy’s death benefit (also known as the coverage amount), if you meet the criteria listed in the policy.
You can check with your insurance agent, financial planner, or financial advisor, or call your insurance company directly to see if an accelerated death benefit is an option on your life insurance policy. You can also refer to this article from Aetna that provides a detailed explanation and reviews accelerated death benefit options.
Top Reasons Given For A Life Settlement
According to our research, there are four top reasons that people decide to sell their life insurance policy in a life settlement or viatical settlement. The list of reasons follows:
- No longer can afford premiums. Life insurance premiums can take up a large percentage of your budget and can grow over time. These expenses are hard to justify in many situations where more important items are a higher priority. Selling a policy not only eliminates the need to spend money on premiums but also puts cash in your hands today. The payout you receive can be used however you see fit.
- Beneficiary no longer needs the funds or is no longer in the picture. When a life insurance policy is initially put in place, it is typically to take care of a spouse, child, another loved one, or a business partner as a contingency in case of an untimely death. As time passes since the policy issuance, those circumstances can change dramatically. The contingency plan may no longer be needed – the home mortgage may be paid off, education expenses already covered, or the business has been sold. If these contingencies no longer exist or the beneficiary is no longer in the picture, the policy may no longer be needed.
- Increased current expenses. Inflation seems to be all over the news today, and it is easy to understand why. The cost of almost everything is increasing. Most seniors are living on a fixed income that does not seem to go as far as was expected. Medical bills and long-term care costs can be quite expensive. For example, according to the U.S. Health and Human Services. Selling your policy eliminates a large current expense and provides valuable cash to cover increasing expenses.
- Term policy is expiring. Many people do not know that most term life insurance policies can be converted into a permanent life insurance policy (for example, whole life policy or universal life policy). While term policies have no investment component or cash value, once converted into a permanent policy, that policy does grow cash value over time. These policies are very attractive to the life settlement and viatical settlement market. Why not get paid cash for an expiring policy that is of no value to you but is valuable in the life settlement market?
Selling Your Life Insurance Policy is Safe and a Sound Financial Planning Tool
The life settlement market grew more than 80% over the last five years (from 2017-2021) as more and more older Americans have learned about the life settlement option. But, is a life settlement safe? There is no question that the answer is a resounding “yes” and a couple of important points emphasize this conclusion:
- Regulation, Regulation, Regulation. Like all insurance products, life settlements are regulated at the state level. Currently, 43 of the 50 states regulate life settlement transactions (covering 90%+ of the U.S. population). This means that the company buying your policy has been vetted by the state insurance regulator and approved to conduct business in your state. You can always check whether the life settlement company you are working with is properly licensed by verifying its status with your state insurance department.
- Disclosure Requirements. All life settlement regulations require certain disclosures, including alternative options, the parties involved in the transaction, and the terms of the policy sale. The disclosures also outline how a payout could impact any public assistance you may receive, whether that is Medicaid or another program.
- Closing in Escrow. All policy sales are closed through an escrow account to ensure the safe closing of the transaction. Escrow Agents are typically FDIC-insured financial institutions. This ensures that your funds are safe and secured before you sell your policy.
- Form Filing and Approval Process. All of the closing documents have been filed with the state regulators and approved for use. This gives you comfort that the transaction terms are fair and have been properly vetted.
- Rescission Period. In all regulated states, the policy seller is afforded a period of time (typically 15 days) to unwind the policy sale if they decide they changed their mind about the policy sale. Ask the life settlement company you are working with what the rescission period is in your state.
What are the Tax Implications of a Life Settlement and/or Viatical Settlement?
The sale of a life insurance policy in a life settlement or viatical settlement transaction may be tax-free under certain circumstances. For additional details on the tax implications, refer to this blog article. While the specifics are outlined in that blog article, part of your proceeds are likely not going to be subject to income tax (what would be considered a return of capital) while part may be subject to ordinary income and/or capital gains taxes. If the insured on the life insurance policy is terminally or chronically ill, the proceeds are likely tax free.
Should you sell your policy if one of these four reasons mentioned above is applicable to you? That is a very personal question that only you can answer. We can provide you the tools to help you make that decision. You can get an instant estimate of the value of your life insurance policy by visiting the Q Life Settlements calculator.
You can also call Q Life Settlements at 866-679-9410, leave your information here, or email us firstname.lastname@example.org to discuss your situation. Our team is available and ready to explain to you all that you would want to know about life settlements.
Remember: Never let a policy lapse or abandon a life insurance policy without looking at the life settlement option first!
Author: Steven Shapiro
Steven Shapiro is the founder of the Company and also the President and CEO of Q Capital Strategies, LLC and Life Settlement Solutions LLC. Steven has been active in the life settlement industry for the last 18 years. In addition to his life settlement experience, Steven has expertise in strategic consulting, investment banking advisory services, and private equity investing. Steven holds a B.A. degree in economics from the University of Pennsylvania and an M.B.A. in finance and entrepreneurial management from The Wharton School of the University of Pennsylvania. Steven is also the immediate past Chair of LISA (having previously served as Chair), the Life Insurance Settlement Association, the oldest and largest trade organization in the life settlement industry.