Should You Sell Your Life Insurance Policy?
Life insurance is designed to provide your estate with the funds necessary to pay debts and leave your loved ones with some financial security. However, there are instances in which you may need money, or your circumstances change, and life insurance is no longer necessary. Selling your life insurance policy is a viable option, but it is critical to understand the process before making this big financial decision. When should you sell your life insurance policy?
Life and Viatical Settlements - What Are They?
Selling your insurance policy to a third party for a specified amount of money is known as a life settlement. You receive cash, and the buyer now owns your policy and continues paying the premiums. When you die, the new owner receives all of the death benefits.
If the policyholder has been diagnosed with a terminal illness and is not expected to survive for more than two years, the life insurance sale is known as a viatical settlement. These settlements can pay for medical expenses and other debts, so family finances are not overwhelmed.
Life Settlement- Are You Eligible To Sell Your Life Insurance Policy?
Not everyone can sell their life insurance policy, as certain conditions must apply. Only those aged 65 and over qualify for a life settlement. Such policies must have death benefits of at least $100,000, and the policy must have been active for a minimum of two years.1
Viatical settlements do not have a minimum age requirement, but the policyholder must generally have two years or less in life expectancy.
Why You May Wish to Sell Your Life Insurance Policy
Every policyholder has their own reasons for selling their life insurance, but common motivations include:
- No longer having anyone reliant on the policyholder’s support
- No heirs
- Funding retirement needs
- Inability to continue paying the premiums
- Needing to pay for nursing home or other long-term care
- Finding themselves over-insured
- No need for the safety net provided by the policy
For many older adults, paying monthly premiums becomes increasingly burdensome. After years of paying premiums, they risk losing their insurance due to an increasing lack of affordability. For some seniors, receiving a lump sum payment is a wiser option than simply losing insurance coverage due to premium costs.
Okay, so you've decided you want to sell your life insurance policy. What's the process?
1. Finding a Buyer
Life insurance sales usually involve working with a broker. The settlement broker will find investors willing to purchase your policy. There is an opportunity to shop for the best deal. You can also work with a provider who will buy the policy from you directly.
Age is typically an important factor when selling a life insurance policy. Potential investors tend to favor policies held by older adults. Why? Because they’re looking to pay as little as possible in future premiums before receiving the death benefit.
If you’re looking to sell your policy, expect to provide all medical records. Using a mathematical formula, medical underwriting by the providers estimates how long the policyholder is expected to live.
2. How Much Is Your Life Insurance Policy Worth?
You will likely not receive your policy’s face value. On average, recipients of a life settlement get approximately four times the policy’s cash surrender value. The death benefit value typically varies between 10 and 25 percent. That means a $100,000 policy will provide you with up to $25,000.2
Factors affecting how much you will get for selling your life insurance policy include life expectancy, its cash value and the premium amount. Individuals with a shorter life expectancy will likely receive a larger settlement amount.
When a policyholder sells their policy, the cash payment is almost always greater than the policy’s surrender value, but less than the death benefit.
3. Decide if You Want to Sell All of Your Life Insurance Policy
If you have a large policy, it is possible to sell only the amount you need. For example, if you own a $2 million policy, you can sell half of it, retaining the rest for beneficiaries.
4. How Do You Want to Be Paid?
Not everyone selling their life insurance policy receives a lump sum. Some people may prefer a settlement in which income is paid over a predetermined amount of time. Talk with your broker or the purchasing provider to evaluate all of your options. Many times, an annuitized settlement will gain you more than a lump sum payout. Patience can pay off!
Other Life Settlement Considerations
What else do you need to think about before selling your life insurance policy?
Before selling your life insurance policy, it is crucial to consider all financial and practical aspects. You’ll want to be sure that the sale of the policy does not trigger tax obligations or result in losing access to public benefits such as Medicaid. There are alternatives to selling your life insurance policy that may prove just as beneficial, such as borrowing from it.
Life settlements include all sorts of fees, and it is vital that you understand all of the costs involved. If you have any questions about whether it makes sense for you to sell your life insurance policy, contact us and we'll see what we can do to help.
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This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.