Recently, several surveys have found that many policyholders give up around $112 billion in life insurance benefits every year in the United States. According to the Life Insurance Settlement Association (LISA), 90% of these people would have considered selling their policies and cashing them out if they knew they had the option.
This goes to show that, while many have heard about selling their life insurance policies, few policyholders understand how it works. This article provides guidelines on how to sell your policy including all the requirements and steps involved.
The answer is yes, you can sell your life insurance policy for cash. U.S. life insurance law provides policyholders with the option of surrendering their life insurance policy or selling it, provided they meet the requirements and follow the due process. As a policyholder, selling your life insurance policy means you are trading the policy with all its associated benefits to a third party in exchange for an agreed amount of money. The buyer automatically becomes the owner of the policy, takes over the premium payment, and is entitled to all the benefits from the coverage.
Due to age, income loss, health challenges, disability, and other factors, many policyholders find it difficult to continue paying premiums in order to keep their policy active. Policyholders are typically given a grace period of 30 days if they fail to pay premiums on their policies in due time.
If, after the grace period, you are still unable to pay the premium, your life insurance policy will lapse. The word “lapse” means you are no longer entitled to any coverage from the policy. You will forfeit the death benefit meant for your beneficiaries if you died. So, to avoid losing out on your policy, you may sell your life insurance and make money from it via either a “life settlement” or “viatical settlement” option.
Different factors determine one’s eligibility to sell a life insurance policy. To start with, the policy must have a value worth selling to a third party. Your age and health will also play a role, and this will largely determine the available avenue through which you can sell the policy.
Selling your policy for cash may make sense in any of the following scenarios:
There are two options for selling life insurance: life settlement and viatical settlement. Here are the steps and benefits of both:
Life Settlement: Life settlement is for seniors (those aged 65 and above) who wish to sell their life insurance policies when it is no longer necessary to keep them active. At this stage, many people prioritize supplementing their retirement savings with the payout from the policy and free themselves from the monthly premium payment. If you meet the age requirement and your life insurance policy has the minimum required value, you can consider this option. Keep in mind that selling your policy via life settlement will require paying taxes on some of the proceeds.
Viatical Settlement: Viatical settlement is designed for policyholders who need to sell their policy for medical reasons. It is for those with a terminal illness and have two years or less to live. The critical health issue may mean that they need funds to settle medical bills and avoid leaving their relatives in debt. In this case, they can sell their life insurance policy to handle these finances. When you sell your policy via viatical settlement as a result of a health issue, the payout is usually tax-free.
Before people can sell their policies via viatical settlement, they will need a doctor’s report as proof of their critical condition. The tax rules governing viatical settlement can sometimes be complex and can quickly change from year to year. Therefore, it is best to consult a financial advisor for clarification on what the law says in your state.
The value of your policy also matters when selling a life insurance policy. Generally speaking, the policy must have a minimum death benefit of $100,000. The higher the value, the more attractive it is to the investors. What you will eventually get as a payout will usually be higher than cash value and less than the death benefit amount. While any type of life insurance policy can be sold, some are more attractive and have higher values.
For instance, policies that build up cash value, such as universal life products, may have a higher market value than term life insurance. Also, convertible term life products with the option to convert to permanent insurance also stand a better chance than other term life policies. Of course, the policy’s premium rate, cash value amount, and whether there are existing loans against the policy are other factors that will determine the payout you can expect.
One good thing about life insurance policy sale is that it is open for negotiation. On average, people receive 20% to 25% of the face value of their life insurance policy depending on the viatical or settlement company you are dealing with. Some policyholders can even get up to 50% of their policy value.
Because each situation is different and there are many factors that determine the amount you can expect, it’s always best to work with a professional when selling. Your policy will be valued based on certain criteria including your age, health, and the remaining portion of time in which the policy will be active.
As we mentioned earlier, the cash payment you will receive will usually be larger than the policy’s cash surrender value but less than the death benefit amount. The timeline for the whole process usually takes months. Depending on the company you are dealing with, you may be paid upfront before the entire contract is finalized.
Before you begin making plans to sell your life insurance policy, you need to understand the pros and cons involved. One of the benefits is that you will be paid a cash lump sum (usually upfront), which you could use as you see fit. This also marks the end of premium payments on the policy, which means you have one fewer expense in your personal finances. The downside is that you will forfeit coverage from the policy and the death benefit payout. You can sell your life insurance policy with the help of life settlement brokers or by directly reaching out to life settlement providers.
A life settlement broker is a professional who will work as your representative in a life insurance policy purchase. The negotiation and every other step in the trading process will be done by the broker on your behalf. He or she must be licensed in your state of residency to qualify to represent you. Life settlement brokers are usually paid on a commission basis.
Life settlement providers, on the other hand, are the companies that buy life insurance policies, usually on the secondary market.
Selling a life insurance policy involves several terms and conditions which include age, health, and the tax rules governing life or viatical settlements in your state. These are complex aspects of life insurance sales which cannot be approached with a one-size-fits-all method, especially as there are varying life insurance laws depending on your state.
Here at LifeQuote, we have a team of highly experienced professionals with a vast knowledge of the insurance industry. For decades, we have been helping our clients meet their various life insurance needs. To better understand the process of selling your life insurance policy, or if you are considering replacing an existing policy with a more affordable option, contact us.