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Ashley Maready
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.
Can you sell a life insurance policy?
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.
How selling a life insurance policy works
When selling your life insurance policy, here are the basics steps you'll go through:
- Find a broker or settlement company: The policyholder shares information about their life insurance policy and health with interested brokers or settlement companies to determine if their policy is sellable.
- Make the sale: The buyer pays the policyholder an agreed-upon sum. The policyholder is absolved of all costs related to the account, and the buyer makes the premium payments on their behalf.
- Change the beneficiary: When the policyholder dies, the death benefit goes to the buyer instead of the originally listed beneficiaries.
How much cash could you get from a life settlement?
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.
Age
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.
Health
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.
Policy value
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.
Financial security of the insurer
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.
Should you sell your life insurance policy?
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.
When a life settlement might make sense
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.
When a life settlement is a bad idea
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.
Pros and cons of selling your life insurance
Here's a look at some of the pros and cons of life settlements.
Pros of life settlement
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.
Cons of life settlement
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.
How to sell a life insurance policy
If you plan to cash out your life insurance policy, take the following steps:
- Gather important documents: Buyers will want information on the life insurance policy and the policyholder's medical records to decide if they're interested in working with them.
- Look for reputable brokers and settlement companies: Interview more than one broker. Learn about whether the company is licensed in the state, how its commission structure works, and whether there are any other costs to be aware of. If you're working with a life settlement company, research the company thoroughly before agreeing to any deals. Policyholders should make sure the company is licensed in the state and ask any questions necessary to learn about how it operates.
- Compare multiple offers: It's a good idea to speak with multiple brokers and settlement companies before agreeing to a deal with any of them.
Alternatives to selling your life insurance policy
If a life settlement doesn't seem like a good fit, one of these alternatives might be better:
- Reduce the death benefit: Some life insurers will enable policyholders to reduce their coverage level in order to make their premiums more affordable.
- Cancel a term life policy: Canceling a term life policy won't provide any benefit to the policyholder, but it can relieve them of the obligation to make premium payments.
- Claim accelerated death benefits: Some life insurance policies have an accelerated death benefit rider. This life insurance rider enables policyholders to tap some of the policy's death benefit while they're still alive if they need it to cover health expenses.
- Surrender the policy: Permanent life insurance builds cash value. If the policyholder no longer wants to keep their coverage, they can surrender the policy and receive some of their cash value as a payout. But there can be fees associated with this.
- Take out a loan: Some permanent life insurance policies enable policyholders to take a loan from a life insurance policy, which they can choose to pay back or not. If they don't, their death benefit is reduced.
- Use the cash value to reduce premiums: Some life insurers also enable policyholders to use some of their cash value to offset the cost of rising premiums as they age.
FAQs
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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.
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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.
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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.
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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.
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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.
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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.
Our Insurance Experts
Kailey Hagen has been writing about small businesses and finance for almost 10 years, with her work appearing on USA Today, CNN Money, Fox Business, and MSN Money. She specializes in personal and business bank accounts and software for small to medium-size businesses. She lives on what's almost a farm in northern Wisconsin with her husband and three dogs.
Robin Hartill, CFP®, is a personal finance writer and editor whose work frequently appears in various national publications. She wrote the syndicated “Dear Penny” financial advice column for four years.
Fact Checked
Ashley Maready
Ashley Maready is a former history museum professional who made the leap to digital content writing and editing in 2021. She has a BA in History and Philosophy from Hood College and an MA in Applied History from Shippensburg University. Ashley loves creating content for the public and learning new things so she can teach others, whether it's information about salt mining, canal mules, or personal finance.
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