How to Sell a Life Insurance Policy
Updated
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Life insurance can help protect the policyholder's family members after they pass and sometimes it even offers benefits to the living. But if the policyholder no longer wants or needs the coverage or has a pressing need for cash, they may wonder whether they should sell the life insurance policy. In this article, we'll look at how to sell a life insurance policy and who it makes sense for.
Selling a life insurance policy to a third party is known as a life settlement. The amount the policyholder receives can sometimes be more than the cash surrender value of insurance, which is the amount you'd receive if you surrender a permanent life insurance policy before you die or the policy matures. However, it's usually much smaller than the policy's death benefit.
A viatical settlement is similar to a life settlement, only it involves someone with a terminal illness selling their life insurance policy to a third party. Typically, payout is substantially higher, because the person's shortened life expectancy means the buyer will spend less on premiums and receive the death benefit sooner.
The policyholder enlists a broker who helps them find a buyer or goes directly to a life settlement company. That buyer pays the policyholder a lump sum. If they go through a broker, the broker takes a cut of that as their payment. Then, the buyer continues to pay the policy's premiums and receives the death benefit when the original policyholder dies.
When selling your life insurance policy, here are the basics steps you'll go through:
A policyholder will typically receive between 10% to 25% of their policy's death benefit in a life settlement, or 50% to 85% of their policy's face value in a viatical settlement. If you have a policy with a $100,000 death benefit, you could receive as little as $10,000 on a life settlement. But if you've been diagnosed with a terminal illness, you could receive $50,000 or more through a viatical settlement. There are several factors that influence how much a person might get from a life insurance settlement, including the following.
Brokers typically like to work with policyholders who are at least 65 years old, as they are likely to die sooner than younger individuals. This means buyers will be able to profit off their investment sooner and will spend less money on premiums.
Individuals in poor health usually receive more money than individuals in good health. This is also because poor health indicates that the policyholder is likely to die sooner.
Brokers usually require policyholders hoping to sell a life insurance policy to have a death benefit of at least $100,000 to interest buyers. Those who have policies with higher coverage limits usually get paid more than those with smaller policies.
Buyers will pay more for insurance policies underwritten by companies with stronger financial strength ratings from independent organizations, like A.M. Best or Standard & Poors. This indicates that the company is capable of paying out its obligations to policyholders.
To those wondering "Should I sell my life insurance policy?," here are a few scenarios when it might make sense and a few where it might not.
A life settlement could be a good idea for individuals who no longer need life insurance because they no longer have dependents relying upon their income. Those struggling to afford the premiums and those who need a lot of cash all at once may also want to consider it. However, there are other alternatives that might help these individuals without some of the pitfalls of life settlements.
Selling a life insurance policy isn't easy, because buyers want to be fairly certain the policyholder will die soon so they can get their payout. Younger policyholders and those in good health may have a tough time finding anyone interested in working with them.
Here's a look at some of the pros and cons of life settlements.
The benefits of selling a life insurance policy are obvious: The policyholder no longer has to worry about making the premium payments. They also get a lump-sum payment they can use for whatever they want.
Selling a life insurance policy can be complex and it doesn't always deliver great returns. Most people get paid far less than their death benefit, and brokers charge high commissions. On top of that, the policyholder may have to pay taxes on the life settlement amount. A cash settlement could also make the policyholder ineligible for public assistance, such as Medicaid.
If you plan to cash out your life insurance policy, take the following steps:
If a life settlement doesn't seem like a good fit, one of these alternatives might be better:
To do a life settlement, a policyholder typically needs to be at least 65 or older with a permanent life insurance policy that has a death benefit of $100,000 or more.
Any proceeds the policyholder receives up to the tax basis (the total amount they’ve paid in premiums over the years) is tax free. Anything in excess of the tax basis up to the cash surrender value of the policy is taxed as ordinary income, while anything over the cash surrender value of the policy is taxed as capital gains.
Viatical settlements typically aren't taxed. Instead, the IRS treats them as an advance of the life insurance death benefit. Because death benefits aren't taxed, neither is the payment from a viatical settlement.
Life settlement brokers charge commission fees to customers, so they profit when the life insurance policy is sold to a new buyer. Life settlement companies typically make money by selling the policies they purchase to institutional investors.
It might be possible to find some buyers willing to purchase a term life insurance policy, but most prefer to work with permanent life insurance.
Selling a life insurance policy can make sense if you no longer need coverage, particularly if you need the money for your retirement or healthcare costs. But be sure you've explored the alternatives to selling your life insurance policy.
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