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How to Sell a Life Insurance Policy

Updated Jan. 14, 2022
Kailey Hagen
By: Kailey Hagen

Our Insurance Expert

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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, they may wonder whether they should sell the life insurance policy. In this article, we'll look at how these life settlements work and who they make 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, but it's usually much smaller than the policy's death benefit.

The policyholder enlists a broker who helps them find a buyer. That buyer pays the policyholder a lump sum, and 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:

  1. Finding a broker: The policyholder shares information about their life insurance policy and health with one or more interested brokers to determine if their policy is sellable.
  2. Making the sale: The broker connects the policyholder to a new buyer who will take over the policy. 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.
  3. Receiving the death benefit: 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?

There are several factors that influence how much a person might get from a life insurance settlement, including:

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 able to profit off their investment sooner.

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 will be around for decades to come and 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 that no longer require life insurance because they don't have any more 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. There are better ways for these individuals to get out from under their life insurance policy.

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, so they could lose some of it to the government.

How to sell a life insurance policy

If you plan to cash out your life insurance policy, take the following steps:

  1. Gather important documents: Brokers will want information on the life insurance policy and the policyholder's medical records to decide if they're interested in working with them. Getting this information together right away can save time later.
  2. Look for reputable brokers: 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.
  3. Compare multiple offers: It's a good idea to speak with multiple brokers before agreeing to a deal with any of them. Policyholders should see what each company can offer and go with the one they’re most comfortable with.

Life settlement companies

Not all life settlement companies are legitimate, so it's important to research the company thoroughly before agreeing to any deals. Policyholders should make sure they're licensed in the state and ask any questions necessary to learn about how the company operates. Policyholders should feel comfortable with the company they're working with before going through with the life settlement.

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 that 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 often 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

  • 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.

  • Life settlement companies charge commission fees to customers, so they profit when the life insurance policy is sold to a new buyer.

  • 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.

  • It's up to each person to decide whether selling their life insurance policy is a good idea. But in most cases, there are other, better ways to handle an unwanted life insurance policy.

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