Selling Your Life Insurance Policy: A Step-By-Step Guide
Selling a life insurance policy is a difficult decision, but it's sometimes necessary to get cash fast!
However, before you make a choice, it's important to weigh the pros and cons. In this guide, we'll share with you the factors you need to consider before selling your life insurance policy. We'll also walk you through the entire life settlement process.
Can You Sell Your Life Insurance Policy?
When you sell a life insurance policy, you're essentially transferring its ownership to another company or investor. From there, they'll become the owner of the policy and will claim the death benefit once you pass away.
This process is also known as getting a life settlement or a viatical settlement. The latter is the term used for deals that were specifically made for individuals with chronic or terminal illnesses. It should be noted that you're also likely to receive more cash for a viatical settlement compared to a life settlement.
One advantage of selling your life insurance policy is that you no longer have to pay the premiums. The life settlement company will pay the premiums in your stead.
Keep in mind that your dependents will lose their right to claim a benefit after your death. If they need that money to replace your income for the next few years, you might want to consider other options.
How Much Money Will You Get For Selling Your Life Insurance Policy?
Generally, you'll receive more money from selling a life insurance policy compared to surrendering the policy to your life insurance company to get its cash value. However, the money you'll receive is less than the face value (or the death benefit), allowing the buyer to gain a profit.
Before you make the permanent decision to sell your policy, you should check if the life settlement provider is offering you a good price. Here are some factors to consider before you sell your policy.
Face Value
In general, you may be able to receive about 10% to 35% of the policy's face value. If the death benefit is significantly more than the life insurance settlement, then it's better to walk away. For example, if you're insured for $500,000, but the buyer is only offering you $20,000 for the policy, you might want to think twice.
Generally, younger individuals are offered less cash for selling their life insurance policy because of their longer life expectancy. The buyer will need to pay more premiums and invest more time before they can collect the death benefit.
Surrender Value
The surrender value refers to the amount of cash you'll receive from canceling your life insurance coverage, minus the surrender fees. You can ask your life insurance provider for the exact cash surrender value of your policy.
Generally, an offer from a life settlement company should be larger than the surrender value of your insurance policy. If they're roughly the same, you may be better off surrendering your policy because it will have fewer tax implications and may also come with lower service fees.
Cash Value
Some types of life insurance policies have a savings component, which is known as the cash value. This is usually true for whole or universal life insurance policies. Generally, term life insurance policies don't carry a cash value.
If you have a whole or universal life insurance policy, it's possible that the cash value of your policy exceeds the offer from the buyer. Ask your insurance company about the policy's current policy value before making a deal.
Life Settlements: How It Works
Getting a life settlement can be a complicated process. If you really want to wait for a suitable offer, closing the deal can take several months. However, if you choose to accept the first offer, the process may only take a month to complete.
Regardless of how fast you wish to close the deal, every settlement transaction will likely go through the following steps.
1. Find A Buyer For Your Life Insurance Policy
The first step is finding a life settlement provider. You can directly approach a settlement company on your own or find life settlement brokers who can present you with multiple offers from different life settlement companies.
Always remember that life settlement companies are businesses that want to profit from you selling your policy. Before you sign a deal, be sure to check if the broker or settlement provider is licensed in your state. If possible, you can also consult your life insurance agent to refer you to trustworthy life settlement providers.
2. Provide Policy Documents And Eligibility Requirements
Before selling your life insurance policy to a life settlement company, you'll be required to present your policy document and your medical records. The potential buyer will make an offer based on your age and health, the type of policy you have, the cash surrender value, and the price of your premium payments.
Generally, buying a policy from elderly people or those who are terminally ill is quite advantageous for a settlement provider. That's because they have to pay fewer premiums and can expect the death benefit within a few years.
3. Evaluate Your Life Settlement Offers
Just like when you're selling a car or a house, you'll need to review all your life settlement offers before you can choose the best option.
Keep in mind that some companies are open to negotiation. If you get a better deal from one buyer, you may present the deal to another buyer to see if they can give you a better offer.
4. Sell Your Life Insurance Policy
Once you've chosen a buyer, all that's left to do is to close the deal. The buyer will pay all the future premiums and may also contact you from time to time to find out if it's time for them to make a claim. Always remember that once this is over, your dependents will no longer receive the death benefit from your life insurer.
Eligibility Requirements For Selling A Life Insurance Policy
You'll usually need to meet a few qualifications before you can sell your life insurance. However, keep in mind that these requirements vary depending on the buyer.
Here are some of the most common eligibility requirements:
- Life expectancy: Most buyers are only interested in purchasing policies from people who are 65 years or older. People who have serious health issues may also find it easier to find buyers because of their short life expectancy.
- Type of policy: People who have a variable, universal, or convertible term life policy may be eligible for a life settlement. Individuals with a standard term policy will need to be chronically or terminally ill in order to qualify for a settlement.
- Age of the policy: Settlement companies will want to know how long you've owned your life insurance. That's because every state requires a certain waiting period before individuals can legally sell their policies.
- Value of the policy: Typically, buyers are only interested in life insurance settlements where the death benefit is at least $50,000.
- Waiting period: According to the Life Insurance Settlement Association, a majority of states require you to wait two years from the date your life insurance policy was issued before you can sell it.
Reasons To Sell Your Life Insurance Policy
There are a lot of cases when life settlements make sense. Here are some of the most common reasons people choose to sell their policies.
Quick Cash
Most people get a life insurance settlement when they need quick cash. Instead of borrowing money from banks, they can just look for a life settlement broker who can help them get as much as possible from their existing life insurance policy. If you need money to pay for your daily living expenses, fund your child's education, or settle outstanding debts, this may be a good option.
No Longer Needing Coverage
People's needs change as they get older, and the same is true for having a life insurance policy. It's possible that you bought the policy when your children were still dependent on your income, but they've now become financially independent adults. Once they're old enough to stand on their own two feet, you no longer need a life insurance policy to act as a financial safety net for your children.
Prevent Policy Lapse
If you no longer have the means to make premium payments, it's better to sell the life insurance policy for cash instead of letting it lapse. That way, you'll get money from the cash settlement and you'll no longer have to worry about future premiums.
Critical Illness
If you're in need of long-term care due to a critical illness, you might need to sell your policy to get cash instantly. This is a good option if your whole or term policy doesn't allow you to access the death benefit early.
Special Considerations For Life Settlements
Selling a life insurance policy is an important and permanent decision. Before you sign a contract, consider the following factors.
Tax Implications
It's possible that you might be obligated to pay income tax or capital gains tax on the cash you'll receive from life settlements. Consult your accountant to learn how much you'll need to pay for selling your policy.
Service Fees For Life Settlements
You'll need to pay service fees for life settlements. The broker will also receive a commission for helping you process the deal.
Outstanding Debts
Always be careful when selling your life insurance policy in case you have outstanding debts. It's possible that creditors may go after the cash you'll earn from the sale once the transaction is closed.
Privacy Issues
If you opt to sell your life insurance policy, you'll be required to disclose your personal information with the life settlement broker and the settlement company. The settlement provider will also want to review your medical records.
Difficulty Getting New Coverage
After you sell your existing life insurance policy, you might find it harder to buy a new one in the future. One reason is that premiums get more expensive as you get older, so you may have trouble paying them. If you've developed health conditions, you might even be disqualified from getting certain types of life policies.
Alternatives To Selling Your Life Insurance Policy
Life settlements come with pros and cons. If you've decided that you'd rather keep your coverage rather than sell your life policy, here are some of your options.
Borrowing From Your Policy
Most types of permanent life insurance policies have a savings component you can withdraw money from, tax-free. This will enable you to get quick access to cash while keeping your coverage.
Surrendering Your Life Insurance Policy
Insurance companies allow policy owners to surrender their policies in exchange for cash. Always compare how much you'll receive from selling your policy to surrendering your coverage before you choose which option is better.
Claiming An Accelerated Death Benefit
If you need cash immediately, you can try to claim an accelerated death benefit. This allows you to withdraw part of the policy's face value before your death. However, you'll need to meet some eligibility requirements to make an accelerated death benefit claim, like being diagnosed with a critical illness.
Converting To Paid-Up Insurance
If you're having trouble paying premiums, you can convert your policy to paid-up status instead of looking at life settlements. This means using the value of the policy to pay the monthly or annual charges instead of paying anything out-of-pocket.
Final Thoughts
Selling your life insurance policy is an option you can consider if you need emergency cash or can no longer afford to pay premiums. Generally, you'll receive more money from life settlements compared to surrendering your life policy to insurance companies.
If you're still unsure whether or not selling your policy is a good idea, get in touch with Wesley Insurance, LLC. We'll help you explore your options so you can make an informed decision regarding what to do with your existing life insurance policy.