Why should I sell my life insurance policy?
As financial security continues to decline nationwide, many Americans are looking to access large hidden stores of personal wealth by selling their life insurance policies for cash. Here are three popular reasons why:
- You need access to a cash lump sum. Life settlements can be worth hundreds of thousands of dollars depending on the face value of the policy, which can be a crucial amount of money for those needing long-term care, or paying off large medical expenses. Selling a policy is almost always worth more than getting its cash surrender value from life insurance companies.
- You don’t want to (or can’t) afford to pay your life insurance premiums. Every year about 4.5% of life insurance policies lapse, which means you lose the value you’ve accrued from premium payments over the years. Selling your insurance policy allows you to financially benefit from a potential policy lapse, rather than surrender all its value to your insurer.
- Your beneficiaries no longer need your death benefit. Finally, the decision to sell your life insurance policy depends on the situation of your beneficiaries. By its design, you will never personally see the value of your death benefit, so a life insurance policy is entirely for your beneficiaries. If your intended beneficiary has unfortunately passed, or they are now children who are grown and financially stable, you may choose to allocate your money elsewhere.
What is term life insurance?
Term life insurance is the most traditional type of policy, which insures your life for a period of time, referred to as the term policy. A term life insurance policy usually comes in increments of 10 years, such as 10, 20 or 30.
What is whole life insurance?
In contrast to term life policies, there are permanent life insurance policies, “whole life insurance,” or the more recent “universal life insurance policies,” which tend to be hybrid models with accumulated cash value.
Because of this stored cash component, most individuals looking to sell their life insurance will not have a universal or whole life policy, but instead a term life policy, as a life settlement is the only way to access any of their policy’s death benefit while still living.
How does selling your life insurance policy work?
The way life settlements work is you legally agree to “sell” your life insurance policy to a third party on the secondary market who will receive the full amount of your death benefit upon your passing. Following the sale, you will cease to have life insurance coverage. In exchange, you receive a lump sum cash payment, typically 10-25% of the total value of your policy, and you will no longer have to pay your life insurance premiums.
To start the life settlement process, you’ll most often begin with filling out a life insurance settlement calculator which will inform you whether or not you’re eligible, and a rough range of the potential payout.
Once you get a soft approval, you’ll need to submit medical records to any interested potential buyers (i.e.life settlement companies), and oftentimes schedule a medical interview as well (to make sure your information is still current).
Once this is submitted, the life settlement provider will review your application and issue a formal offer. This whole process can often take 2-4 months.
Waiting Periods: 30 states have a statutorily mandated two-year waiting period before one can sell their life insurance policy. Another 11 states have five-year waiting periods, and Minnesota has a 4-year waiting period.
Most states have exceptions to waiting periods, such as if the policyholder meets certain criteria like terminal illness, a major life change like divorce or retirement or an existing disability. Currently, 8 states and Washington D.C. have unregulated life insurance settlements.
Am I eligible to sell my life insurance?
Not everyone will be approved for a life insurance settlement. In order to sell your life insurance policy, you will need to meet a few industry-wide standards:
- Be over age 65
- Have an active policy with a death benefit of at least $50,000
- Have had the policy active for at least two years
Exceptions to age requirements exist if you (or the policy owner looking to sell) have a diminished life expectancy as result of a terminal illness (this is referred to as a viatical settlement). While all eligible individuals may apply, those under age 70 with no serious health problems are unlikely to get an offer higher than the cash surrender value of their policy.
What does it cost to sell my life insurance policy?
There are a few costs associated with selling your life policy. Submitting the proper medical records to potential settlements can cost up to $1,000.
On top of that, if you use an insurance agent or broker, they will often charge a percentage of the death benefit for their service. Keep in mind, brokers will often charge in terms of total death benefit, while you receive a gross payout.
As we mentioned before gross cash payouts tend to be around 10-25% of death benefit, which means a broker charging 6% of the death benefit can actually be charging over 30-40% of the payout you receive.
How do I know I can trust my broker?
If you decide to go with a life settlement broker, we recommend always researching them first. We recommend verifying your broker using the search portal at FINRA (Financial Industry Regulatory Authority) or checking with your local state insurance department.
Things to be cautious of when selling your life insurance policy
Though the process of selling your life insurance is straightforward, the effects it can have on you and your loved ones are not. Here are a few things you should consider before selling your life insurance:
- Income taxes. While some settlement transactions are considered to be tax-free, others may require you to pay taxes. Be sure to understand your tax implication before selling your policy, as the payouts can range into the hundreds of thousands.
- Your beneficiaries. It’s crucially important that clearly understand, selling your life insurance policy means your beneficiaries will no longer receive any money. If you have family members such as a child or spouse who were previously the beneficiary, you’ll want to make sure to discuss this with them.
- Decisions are final. Once you sell your policy, you cannot retrieve it. Some states do provide 15 to 30 days after receiving the settlement disbursement to change your mind, so be sure to know your cutoff date.
- Medicaid eligibility. If you complete a large life settlement transaction, you may lose your medicaid eligibility as you cannot have more than $2,000 in assets. If you rely on medicaid benefits, be sure to check with a medicaid advisor or financial advisor before selling your life insurance policy.
Note: There are 8 states in which life settlements are currently unregulated: Wyoming, South Dakota, Missouri, Alabama, New Mexico, South Carolina and Michigan, as well as Washington D.C. You will need to be extra careful when navigating life settlements in these locations, and it’s highly recommended you reach out to an expert or financial advisor first.
Alternatives to selling your life insurance policy
If you want to make cash off your life insurance policy, but are not wanting to sell it, you still have the option of getting a loan against your policy’s value. You may also pursue accelerated death benefits if you are terminally ill or have a qualifying long-term benefit. You may also consider a 1035 exchange, which allows you to exchange one insurance policy for another without paying taxes or capital gains.
Finally, if your beneficiaries want to keep the policy intact, but you cannot afford to make payments, consider asking them to cover the monthly premium payments.
Are life settlements safe and legal?
Beginning in the 1980s, the process of selling life insurance policies — also known as life settlements—emerged as an effective way for policyholders nearing the end of their lives to receive a substantial infusion of cash and eliminate their expensive monthly premiums, by selling their life insurance policies.
While the life settlement industry has really established itself in the last 30 years, the legal precedent for the sale of a life insurance policy goes back to a supreme court case in the early 20th century, Dr. Grigsby v. Russell, which established that life insurance was an asset, including all attendant rights of valuation and sale.
This precedent went largely untested until the 1980’s when the U.S. AIDS epidemic saw thousands of men with diminished life expectancy looking to find a means of paying for their medical expenses. It was in these times that the first viatical settlement contracts first came to be — oftentimes between individual investors and policyholders.
Today, life settlements have grown into a well-regulated, $3 billion industry, helping everyone from the terminally ill to those just needing to weather difficult financial times.
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Should you sell your life insurance policy? It all depends on your life insurance needs. If you can no longer afford premiums, your beneficiaries don’t need your death benefit, or you need a cash lump sum immediately, a life settlement may be the answer.
Of course, as with most insurance products, it’s always a good idea to consult your financial advisor or insurance agent for more information. For an instant estimate on how much your life insurance policy could be worth, take advantage of our free life settlement calculator below.