You can sell your life insurance policy for cash if you no longer need life insurance coverage. This process, also known as a life insurance buyout, typically results in a lower payout and comes with high overhead costs. Additionally, selling a life insurance policy for cash means your beneficiaries will get zero benefits when you pass away.
Exploring your life insurance settlement options and weighing the pros and cons of selling a life insurance policy for cash can clarify whether this is a beneficial move for you, depending on your financial situation and future needs.
TABLE OF CONTENTS
- How to Sell a Life Insurance Policy
- Common Reasons for Selling a Life Insurance Policy
- Who Can Sell Their Life Insurance Policy?
- How Much Can You Get for Selling a Life Insurance Policy?
- 5 Tips for Selling a Life Insurance Policy
- Pros and Cons of Selling a Life Insurance Policy
- Alternatives to Selling a Life Insurance Policy
Key Takeaways
Selling your life insurance policy for cash can provide immediate financial relief, but typically at a fraction of the policy's death benefit.
Generally, eligibility for selling a life insurance policy starts at age 65, with younger policyholders qualifying under severe health conditions.
Explore life insurance settlement options carefully; consider alternatives like loans or policy adjustments to maintain benefits and avoid potential drawbacks.
How to Sell a Life Insurance Policy
Life insurance provides a financial safety net for your dependents in the event of your passing. However, you may sell your life insurance policy to a third party if you no longer need coverage. The process involves finding a broker or a life settlement company that will connect you to interested buyers.
- Life Settlement: This term applies if you’re in good health and selling your life insurance policy for a cash payout.
- Viatical Settlement: If you have a terminal or chronic illness, your life insurance policy can be settled at a discount from its face value for a cash payout.
Once you’ve chosen a buyer, you'll need to complete an application form and provide the necessary documents. In return, the buyer will pay you the agreed-upon sum for your policy and take over the premium payments.
You can anticipate having to answer questions about your health when selling your life insurance policy for cash. Unlike with a life insurance underwriter, you may receive a better offer with a settlement company if you are older or in poor health. That’s because the buyer gets the death benefit after you pass away.
WHEN CAN YOU SELL YOUR LIFE INSURANCE POLICY?
Most policyholders can only consider selling their life insurance policy for cash when they are 65 or older or in poor health. Engaging in life insurance settlement options allows them to manage their financial needs more flexibly by accessing the value of their policies sooner rather than later.
Common Reasons for Selling a Life Insurance Policy
There are various reasons why policyholders choose to sell life insurance policies for cash. Here are some of the most common:
Financial Needs: Individuals may sell their insurance policy for cash to meet immediate financial needs or obligations, such as paying off debts or medical expenses.
Change in Beneficiaries: It may be worth selling your life insurance policy for cash if your beneficiaries are financially independent adults who don’t need the death benefit.
Policy No Longer Needed: If you have assets that can adequately cover various expenses after your death, selling your life insurance policy for cash allows you to reallocate funds to other priorities.
Premium Burden: Maintaining life insurance can be costly, especially as premiums escalate with age. For example, the average cost of term life insurance is $1,092 per year or $91 per month for a 60-year-old. If these costs become unsustainable, selling the life insurance policy for cash may help alleviate financial stress.
You may get a better offer on your life insurance policy if you are 65 or older. However, be wary of brokers and settlement companies targeting your age group to do unlawful transactions. For example, they may offer you cash to apply for an insurance policy that pays out to a third party.
Who Can Sell Their Life Insurance Policy?
Selling a life insurance policy is a significant decision, and not everyone qualifies. The factors that will qualify you include:
Age
Typically, sellers must be 65 or older, although exceptions may apply for significant health issues. This also depends on the policy and the settlement company. Different companies and policies may have varying criteria, so it may be best to consult with a professional to understand your specific eligibility.
Policy Type
Certain types of policies, such as universal life insurance, may be more suitable for life insurance buyouts.
Minimum Death Benefit
The policyholder usually must have at least a $100,000 death benefit.
Policy Age
Generally, the policyholder should have had the policy for at least two years.
Premium Percentage
The annual premium should usually be less than 5% of the policy's face value.
Understanding these criteria is essential for anyone considering selling a life insurance policy for cash. It is advisable to explore the different settlement options life insurance companies offer to find the best fit for your situation.
How Much Can You Get for Selling a Life Insurance Policy?
The amount you'll receive for selling a life insurance policy depends on various factors, including life expectancy, face amount and expected premiums. Life settlement companies often calculate the offer based on these variables, considering both the cash surrender value and the potential death benefit.
Is the Money Gained From Selling a Policy Taxable?
Generally, if the amount you received from selling your life insurance policy exceeds the total premiums paid, the excess may be subject to income or capital gains tax. According to the IRS, taxation depends on the nature of the settlement and the policyholder's individual situation.
Let's say you paid $30,000 in premiums for your life insurance policy over the years. If you sell the policy for $50,000, the excess $20,000 ($50,000 minus $30,000) could be subject to taxation. The specific tax rate would depend on various factors, including your income level and the nature of the life settlement.
Consult with a tax professional or refer to specific IRS guidelines to understand the tax implications for your particular case. Understanding the tax consequences ahead of time can help you make a more informed decision about selling your policy and plan for any potential tax liability.
5 Tips for Selling a Life Insurance Policy
Although selling your life insurance policy for cash is possible, finding a broker or life settlement company to offer you a great deal can be challenging. MoneyGeek outlined five tips for selling your policy to help you maximize your cash payout and experience a successful transaction.
Key Takeaways
Enlist the help of a broker or a life insurance settlement company to find a buyer for your life insurance policy.
Buyers tend to prefer life insurance policies from policyholders aged 65 and above or those with a critical illness.
When you sell your life insurance policy for cash, your payout usually falls between the death benefit and the cash value.
1
Do Your Research
Before selling your life insurance policy for cash, it’s important to understand how it works, who can help you and what to expect. Make sure you know what type of life insurance you have to determine whether a life settlement can be an option. Generally, you cannot sell group life insurance, government-issued life insurance or employer-provided life insurance.
Understand the factors that can affect the offers you will receive, such as your policy’s cash value, the premium amount and your life expectancy. Be sure to review the rules and regulations of life and viatical settlements in your state as this can make or break the transaction.
2
Complete Your Documents
When selling your life insurance policy, you need to gather the documents required to complete the sale. These include your life insurance policy documents and medical records. Buyers typically want to know the details of your insurance coverage and your health history and status to determine the value of your policy. Prepare all this information beforehand to save time later.
To avoid issues during the sale, make sure that your documents are complete and that the information in your application is correct.
3
Get Professional Assistance
For significant financial decisions, a financial advisor can break down the pros and cons of selling life insurance to help you determine if this option is worth it. They can also assess the value of your life insurance policy.
To find the right financial advisor for your financial goal, you need to review their qualifications, experience and expertise. Assess your compatibility as well — your financial advisor should be easy to talk to and someone you feel comfortable with.
4
Find a Reputable Broker
When looking for a reputable broker, interview multiple candidates. Ask questions such as how their commission structure works and whether they are licensed in the state to determine if they suit your needs. Also, pay close attention to their transaction fees and check the company’s terms and conditions before signing any paperwork.
5
Shop Around
As a rule of thumb, don’t accept the first offer that comes your way. Life insurance settlement options and offers vary widely across settlement companies, so compare them before agreeing to sell your life insurance policy.
When shopping around, it’s valuable to know the present market value, but try to manage your expectations. You usually won’t get the face value of your life insurance policy. Instead, your cash payout will typically fall below the death benefit and above the cash value.
Pros and Cons of Selling a Life Insurance Policy
Before selling your life insurance policy for cash, talk to your family members and a certified financial advisor. Examining the pros and cons of selling life insurance can also help you make a wise financial decision about your circ*mstances.
Pros of Selling a Life Insurance Policy
The main benefit of selling your life insurance policy is to receive a cash payout, which you can use for various expenses. Here are the biggest benefits:
- Immediate Cash Access: You receive a lump-sum payment that you can use for any financial purpose, like medical expenses or other unexpected costs.
- No More Premium Payments: Once you sell a life insurance policy, you’re no longer responsible for paying premiums, freeing up monthly expenses.
- Potential for Higher Offers: If you are older or in poor health, you may receive a better offer with a settlement company, as the buyer gets the death benefit after you pass away.
- Flexibility: Selling the policy provides flexibility in managing your assets if your beneficiaries are financially independent or your financial situation has changed.
Remember that these are applicable if you’re carrying permanent life insurance. If you have term life insurance, it’s generally better to cancel your policy or let it lapse because term policies have no cash value, unlike permanent life insurance.
Exercise caution when looking for the best company to sell your life insurance policy to; not all options are legitimate. Research each company before entering a contract to avoid life insurance scams.
Cons of Selling a Life Insurance Policy
Although life insurance settlements can give you access to a lump sum of money, there are several pitfalls you need to be aware of. Some of the drawbacks of selling your life insurance policy include:
- Challenging Sales Process: Most buyers prefer policyholders with a short life expectancy to get their payout. If you are young or healthy, you may have difficulty finding an interested buyer.
- Low Returns: Payouts for a life settlement are often lower than the death benefit. On average, they can range from 20% to 25% of the policy’s face value.
- Broker or Settlement Company Fees: Brokers and settlement companies charge fees to help you find a buyer for your life insurance policy.
- Taxable Sale: You may have to pay taxes on the proceeds you receive from the sale of your policy.
Keep in mind that your cash payout may disqualify you from getting public assistance. As always, it’s best to talk to a financial advisor before making a decision.
Alternatives to Selling a Life Insurance Policy
Most people sell their life insurance policy due to expensive premiums or unexpected costs that need quick funding. However, there are ways to address these financial situations without going through the settlement process.
Consider the following options before selling your life insurance policy:
- Use Your Cash Value: If you have permanent life insurance, you can use your accumulated cash value to offset the cost of your premium.
- Get a Personal Loan: Taking out a personal loan may be better than selling a life insurance policy if you need access to cash.
- Take Accelerated Death Benefits: If your policy has an accelerated death benefit provision, you may tap into your death benefit early to cover expenses.
- Take a Loan Against the Policy’s Cash Value: Your permanent life insurance may allow you to borrow money against the total value of your policy.
- Exchange Your Policy: You can swap your life insurance policy for another without paying tax through a 1035 exchange.
- Surrender Your Policy: Depending on your life insurance policy, you may surrender your coverage and receive some of your cash value as a payout.
- Cancel Your Policy: You may cancel your term life insurance policy to cut your financial responsibility related to the account.
- Convert Your Policy to Whole Life Insurance: If you have a term policy, you may have the option to convert it to whole life insurance. This provides lifelong coverage and potentially builds cash value. This conversion can offer continued protection without the need to sell the policy.
- Reduce Your Policy's Death Benefit: By reducing the death benefit, you may be able to lower your premiums, making the policy more manageable without giving up coverage entirely. This reduction can ease the financial strain while maintaining some level of benefit.
Additionally, you can explore various ways to lower your life insurance costs so you won’t have to sell your life insurance policy.
CAN YOU REVERSE A LIFE INSURANCE SETTLEMENT?
Having seller’s remorse? You can reverse a life settlement and have your coverage reinstated. Consult with your state insurance department to learn more.
FAQ About Selling Your Life Insurance Policy
While a life or viatical settlement can give you instant cash, the process can be costly and complex. MoneyGeek answered frequently asked questions about selling your life insurance policy to help you make a wise financial decision.
Can you sell your life insurance policy?
Yes, you can sell a life insurance policy through a life settlement, where companies that buy insurance policies offer a cash payout.
What is a life settlement?
A life settlement involves selling life insurance to a third party for a cash amount before the policy matures. The transaction typically results in a payout greater than the policy's cash surrender value but below the total death benefit.
Who qualifies for life settlements?
If you are 65 or older and your death benefit is at least $100,000, you may be qualified to sell your life insurance policy.
Who buys life insurance policies?
Life insurance policies are typically bought by life insurance settlement companies or individual investors interested in the policy's death benefit.
How much can you sell your life insurance policy for?
Payouts for life settlements tend to vary per settlement company. Factors such as your health status, age, type of policy and cash value can significantly affect the offers you receive.
Can you sell a life insurance policy that is not paid up?
Yes, you can, but your policy must be in good standing to complete the sale.
What happens under a viatical settlement?
In a viatical settlement, a critically ill policyholder sells their life insurance policy at a discount from its face value. The buyer pays the premiums and receives the death benefit upon the policyholder's death.
Can you sell a term life insurance policy?
Selling a term life insurance policy for cash is possible, especially if it's convertible to permanent insurance.
Who buys term life insurance policies?
Companies specializing in life insurance settlements often buy term life insurance policies, particularly those that can be converted to permanent policies.
Can you sell a whole life insurance policy?
Yes, you can sell a whole life insurance policy through a life settlement. This type of policy is particularly appealing to buyers due to its cash value accumulation and permanent coverage.
At what age can you sell your life insurance policy?
Generally, you can sell your insurance policy when you're 65 or older, although younger individuals with health concerns may also qualify.
Can you sell your life insurance policy if you are under 65?
Yes, selling your life insurance policy under 65 is possible, especially if you have a terminal illness or significant health issues.
How do you sell your life insurance policy?
To sell your insurance policy, contact a broker or a life settlement company, who will guide you through the process and connect you with potential buyers.
Why would you sell your life insurance policy?
You might sell your insurance policy for cash to alleviate premium burdens or if the policy's original purpose is no longer relevant.
How long does it take to sell a life insurance policy?
The time it takes to sell your policy may depend on the offers you receive. When comparing multiple offers, take your time to get the best deal for your specific circ*mstances.
Is selling your life insurance policy worth it?
It’s up to you to determine whether a life settlement is worth it. In most cases, there are better ways to access cash without selling your policy.
What happens to the policy after it's sold?
Once the policy is sold, the new owner (usually an investor or a life settlement company) takes over the premium payments and becomes the beneficiary of the death benefit. The original policyholder relinquishes all rights and benefits associated with the policy.
Are there any fees or costs associated with selling a life insurance policy?
Yes, there may be fees or costs associated with selling a life insurance policy. These can include broker commissions, transaction fees or other charges levied by the life settlement company. Consider inquiring about all potential fees upfront and factor them into your decision-making process to understand the net amount you will receive.
Should you sell a life insurance policy with a lower or higher surrender value?
Consider selling a life insurance policy with a higher surrender value to maximize your cash payout. However, factors like premium costs and coverage needs should also guide your decision.
How much can you sell a $100,000 life insurance policy for?
The payout for selling a $100,000 life insurance policy varies, typically ranging from 20% to 25% of the policy’s face value, depending on your age, health and the policy terms. This means for a $100,000 policy, you could expect to receive between $20,000 and $25,000. The exact amount you can sell your policy depends on several factors.
About Mark Fitzpatrick
Mark Fitzpatrick is a Licensed Property and Casualty Insurance Producer and MoneyGeek's Head of Insurance. He has analyzed the insurance market for over five years, conducting original research and creating personalized content for every kind of buyer. He has been quoted in several insurance-related publications, including CNBC, NBC News and Mashable.
Fitzpatrick earned a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He is passionate about using his knowledge of economics and insurance to bring transparency around financial topics and help others feel confident in their money moves.
sources
- IRS. "Tax Guide for Seniors." Accessed June 13, 2024.
