Life Insurance is a sensible policy to ensure your survivors will have adequate savings if you are no longer around to provide. However, in some instances, you may decide you no longer need the coverage and may be interested to learn that you can sell your life insurance policy. Perhaps your children are grown, or you have built substantial savings; in such instances, it may make sense to sell your life insurance policy and tap into the money today.
Owning a life insurance policy gives you the authority to enact your best judgment for it. You choose which policy best suits you, how much you’re willing to invest, and, ultimately, if you want a life settlement (selling your policy).
A life insurance policy can be a valuable investment and insurance product. Because it is considered an asset, it equates to cash or monetary value. The value of this can be significant enough to consider selling a life insurance policy.
The process can be complicated, and there are many questions entangled. This article breaks down the information to help you decide whether you need or want to sell your life insurance and how to do just that.
What is a Life Insurance Policy?
Life Insurance guarantees the policy owner of financial assistance in the form of death benefits. Even when the policy owner dies, the named beneficiaries can claim the policy’s face value or death benefit. A life insurance policy is a legally binding contract that ensures this. However, the appeal and strength of the death benefits depend on the company that issues it, which is an important consideration when choosing the type of policy you will eventually purchase.
For a life insurance policy to continuously remain in force, the policy owner needs to make their premium payments through a single lump sum payment or regular premiums over an agreed-upon timeframe.
Types of Life Insurance Policies
There are two types of life insurance policies concerning a policy owner’s lifespan – term life insurance and permanent life insurance.
Term Life Insurance Policy
Term life insurance will last for only a certain number of years, commonly among the following choices: 10, 20, or 30 years. When choosing a term life insurance policy, you must balance affordability and long-term financial strength.
3 types of term life insurance policies that can suit your needs
- A decreasing term life insurance is renewable, but the catch is that the policy coverage will decrease over time at a predetermined rate.
- Convertible life insurance, as alluded to by its name, allows the owner to turn a term life insurance policy into a permanent insurance policy.
- Renewable term life insurance will allow you to renew your policy but with an expected increase in premiums.
Affordability is one of the most significant benefits of a term life insurance policy. It is often less expensive than permanent life insurance because of its limited-time coverage.
Permanent Life Insurance Policy
A permanent life insurance policy is effective until the policy owner halts premium payments or if you surrender your policy. Otherwise, it applies until the owner’s death.
4 types of permanent life insurance policies that you can choose from:
- A whole life insurance policy accumulates cash value. Cash value life insurance will grant the policy owner the agency to choose how to use the cash value. Common examples include using the policy’s cash value as a source of loan or even to pay the premiums.
- A universal life insurance policy comes with a cash value that earns interest. Moreover, it also has flexible premiums. For example, the premiums can be adjusted over time but with a set level death benefit or an increasing death benefit.
- An indexed universal insurance policy is similar to the previous one because the cash value component can earn the policy owner added benefits. But, in this case, the policy achieves a fixed or equity-indexed rate of return instead of interest.
- Lastly, a variable universal life insurance policy allows the policy owner to invest the policy’s cash value into an investment account. Similar to universal life insurance, the premiums can also be adjusted to a level or increased death benefit.
Why Do You Need a Life Insurance Policy
Life insurance has multiple benefits. The obvious one is the money provided to the beneficiaries who would otherwise suffer financial loss upon the insured’s death. But, the benefits accrue throughout the policy owner’s life. It can provide tax advantages such as tax-deferred growth of cash value, tax-free dividends, or tax-free death benefits.
Reasons to Sell Your Life Insurance Policy
Given all the benefits of a life insurance policy to the policy owner’s family and themselves, why would you sell your policy? Here are the reasons why you should sell your life insurance policy.
Urgent Financial Needs
Your decision to purchase a life insurance policy may be part of a more long-term goal. But this does not change the fact that you are faced with urgent and real economic challenges. If today’s financial challenges become a burden, life insurance’s benefits may not be worth it.
One of the most common reasons for selling your life insurance is to pay off unexpected medical bills. Terminally ill patients, for example, use their life insurance to afford treatments and other needs. The money can still be used for more long-term needs, such as long-term facilities for the ill or recurring health expenses.
You are the best person to assess your needs; some of these necessities may have come sooner than expected.
Decreased Financial Burden
Insurance premiums may decrease over time. Either because you purchased the plan late, thereby increasing the considerations for the insurance company, or because of inflation and company performance. Either way, high premiums may only be affordable for some, even those who could afford the life insurance policy in the past.
Another reason people sell their life insurance is because of the cost of premium payments which outweigh the benefits. For example, the policy owner may not have dependents anymore that would have benefitted from the insurance. Or, the future benefit does not outweigh the benefits of spending the money today.
If you cannot afford the premiums, do not surrender your insurance policy or allow it to lapse. Life settlements will enable you to access the premiums paid over the years.
Change of Priorities
When purchasing, you may have considered factors that no longer apply today. Retirement income is also a common reason for a life settlement. If your children and family have grown independent, there are fewer long-term factors to worry about. Thus, retirement funds are now your new priority. Perhaps ticking off items and activities on your life bucket list will give you better value for your money. If that’s the case, a life settlement is the best decision for your life insurance policy.
Reasons to Hold On to Your Life Insurance Policy
To the same tune, there are also advantages to holding on to your life insurance policy.
It takes a certain lifestyle to have multiple factors contributing to financial uncertainty. For example, if you assess your lifestyle as risky, a fool-proof long-term plan will fit your needs more than its current cash value.
A few examples include having a high-risk job. If you work in a high-risk environment, you have greater chances of injury or death. The costs of which can be covered by the life insurance policy. Moreover, if your interests lie in extreme hobbies, a higher interest premium may be worth it to cover unexpected injuries or death.
If your children are grown but have high-risk jobs or are not fully independent from your support, a life insurance policy will prevent them from inheriting financial burdens. This also applies to your parents if they depend on your support for their needs.
Support for Financial Goals
Life insurance is not just for others but can be used to benefit yourself. As a policy owner, you are guaranteed cash value growth as the premiums build up. As a result, life insurance can supplement your retirement income, fund your or a family member’s education, pay a debt, or be used for future emergencies.
Some life insurance policies also offer dividends. Although there’s uncertainty to this, receiving them can be used to offset premium payments or for other financial needs.
When you sell your life insurance policy, it’s called a life settlement. You can proceed with the sale through a life settlement provider or a life settlement broker, who will find an interested buyer for the insurance policy.
The payment for a life settlement is more than the cash surrender value, which policy owners receive when they surrender their policy. However, as expected, the value is less than the overall death benefit.
Can you Sell your Life Insurance Policy for Cash?
As an owner of a life insurance policy, you can claim the payment of your life settlement in cash. This is subject to the qualifications that determine whether you can sell your life insurance policy, and the value will also depend on the factors covered by the insurance.
Another option to receive cash to address urgent needs is through a viatical settlement. Similar to a life settlement, it will still require the sale of a life insurance policy to a third party. But, the policy will have to be sold at a discounted price in exchange for an immediate cash payment.
Types of Settlement Offers
Types vary due to situations, and you could choose the best one for your circumstances.
A lump sum of cash is offered for the life insurance policy. A viatical settlement is an example.
Retained Death Benefit
The policy owner will retain a portion of the face value in this exchange. However, the owner does not have to continue paying premiums but will only get the retained death benefit as indicated.
As stipulated in the name, this offer is a mix of the cash offer, and the retained death benefits offer. This could be used to maximize the policy’s value in favor of the policy owner. For example, you could ask for a cash offer to remedy immediate expenses but stipulate a retained death benefit for future expenses.
Selling Your Life Insurance
If you have decided that your present financial needs are more important or if you’ve found a way to maximize your life insurance’s short- and long-term capabilities through a life settlement, then it’s time to get your strategy rolling.
Can Your Life Insurance Policy Be Sold?
The first step is to determine whether you qualify for the option to sell your life insurance policy.
While the actual specifics may differ based on the company, you’re dealing with. Here are the general requirements for selling your life insurance policy.
- Older than 65 years old
- Own a policy worth more than the stipulated amount in your country’s laws
- Have health problems or have a life expectancy of at most 15 years
- Be a qualified citizen of the country you will be dealing in
Determine the Value of the Policy
In the same way you have varying premium payments and death benefits, the overall value of your insurance policy may also differ.
Factors Affecting the Policy’s Value
Here are the factors that may affect the value of your policy in the market:
- Face value or coverage amount of the policy
- Policy owner’s life expectancy
- Premium payments
- The market’s rate of return
- Health conditions affecting the overall amount and death benefit of the policy
The Process for Selling Your Policy
Life settlement companies will start with a life settlement application. This step determines whether you are eligible for the transaction by ordering the required documentation and authorizations. The same information will be given to the buyers when they evaluate. The costs of verifying these documents are covered by life settlement companies which are carried over to the buyer later on.
Once the information has been collected and verified, the underwriting process begins. Summaries of health records and life expectancy reports are generated for the investors’ and buyers’ benefit. These documents are the basis when the life settlement companies release the policy for sale and the offers buyers are willing to make.
When the seller accepts an offer, the closing provider or the insurance provider creates a contract stipulating disclosures, authorizations, and releases. The policy owner, insured (if they’re separate entities from the owner), beneficiaries, and spouse (whenever applicable) are all to sign the agreement. As the seller completes the requirements, the buyer funds the escrow account. All the documents are gathered to ensure compliance. After which, the funds are paid usually after three business days of confirmation, and the transaction is completed.
When deciding to proceed with a life settlement, you must weigh your priorities and necessities. On the one hand, proceeding will guarantee an immediate benefit or, at least, a decreased burden to pay premiums. But on the other, you may leave dependents without future financial support. Depending on which gain is more appealing to your situation, that is where your insurance money and its value are maximized.
Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.
Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.