Can You Sell Your Life Insurance Policy?

You can sell your life insurance policy for cash if you no longer need life insurance coverage. This process, also known as a life insurance buyout, typically results in a lower payout and comes with high overhead costs. Additionally, selling a life insurance policy for cash means your beneficiaries will get zero benefits when you pass away.

Exploring your life insurance settlement options and weighing the pros and cons of selling a life insurance policy for cash can clarify whether this is beneficial for you, depending on your financial situation and future needs.

Life insurance provides a financial safety net for your dependents in the event of your passing. However, you may sell your life insurance policy to a third party if you no longer need coverage. The process involves finding a broker or a life settlement company that will connect you to interested companies that buy existing life insurance policies.

• Life Settlement: This option is suitable if you're in good health and looking to sell your life insurance policy for cash. It involves selling the life insurance policy to a third party who will continue paying the premiums and, in return, receive the death benefit upon your passing.
• Viatical Settlement: If you have a terminal or chronic illness, you might opt for this. It's an arrangement that allows policyholders to sell life insurance for cash at a discount from the face value, providing immediate financial relief.

Once you’ve chosen a buyer, you must complete an application form and provide the necessary documents. In return, the buyer will pay you the agreed-upon sum for your policy and take over the premium payments. This process is often referred to as a life insurance buyout.

You can anticipate having to answer questions about your health when selling your life insurance policy for cash. Settlement companies may offer more favorable terms than traditional life insurance underwriting, especially if you are older or in poorer health, due to the higher likelihood of claiming the death benefit sooner.

There are various reasons why policyholders choose to sell life insurance policies for cash. Understanding these reasons can help determine whether selling a life insurance policy for cash aligns with your financial strategy.

• Financial Needs: Individuals may sell their insurance policy for cash to meet immediate financial needs or obligations, such as paying off debts or medical expenses.

• Change in Beneficiaries: If the beneficiaries of your policy are now financially independent or the family dynamics have changed, you might consider selling your life insurance policy for cash. This allows you to benefit from the policy's value during your lifetime rather than leaving a death benefit.

• Policy No Longer Needed: If you have assets that can adequately cover various expenses after your death, selling your life insurance policy for cash allows you to reallocate funds to other priorities.

• Premium Burden: Maintaining life insurance can be costly, especially as premiums escalate with age. For example, the average cost of term life insurance is $1,092 per year or $91 per month for a 60-year-old. If these costs become unsustainable, selling the life insurance policy for cash may help alleviate financial stress.

You may get a better offer on your life insurance policy if you are 65 or older. However, be wary of brokers and settlement companies targeting your age group to do unlawful transactions. For example, they may offer you cash to apply for an insurance policy that pays out to a third party.

Selling a life insurance policy is a significant decision, and not everyone qualifies. The factors that will qualify you include:

Understanding these criteria is essential for anyone considering selling a life insurance policy for cash. It is advisable to explore the different settlement options life insurance companies offer to find the best fit for your situation.

Each policy type has nuances in terms of market value and the process involved in the sale. Finding the best company to sell your life insurance policy to can ensure you receive the maximum financial benefit. Consider consulting with a broker or a firm specialized in life insurance selling to get guidance. They can also provide tips for selling life insurance effectively.

The amount you'll receive for selling a life insurance policy depends on various factors, including life expectancy, face amount and expected premiums. Life settlement companies often calculate the offer based on these variables, considering both the cash surrender value and the potential death benefit.

For example, policies with a higher face value and lower expected future premiums generally yield higher offers, especially if the insured’s life expectancy is shorter than average. A term life insurance buyout might lead to a different amount compared to selling a whole life policy due to the differences in cash value accumulation and premium costs.

Companies specializing in these transactions can offer tailored advice on the best way to sell life insurance based on your specific policy and needs.

Generally, if the amount you received from selling your life insurance policy exceeds the total premiums paid, the excess may be subject to income or capital gains tax. According to the IRS, taxation depends on the nature of the settlement and the policyholder's situation.

Let's say you paid $30,000 in premiums for your life insurance policy over the years. If you sell the policy for $50,000, the excess $20,000 ($50,000 minus $30,000) could be subject to taxation. The specific tax rate would depend on various factors, including your income level and the nature of the life settlement.

Consult with a tax professional or refer to specific IRS guidelines to understand your case's tax implications. Understanding the tax consequences of selling a life insurance policy ahead of time can help you make a more informed decision and plan for any potential tax liability.

Although selling your life insurance policy for cash is possible, finding a broker or life settlement company to offer you a great deal can be challenging. MoneyGeek outlined five tips for selling your policy to help you maximize your cash payout and experience a successful transaction.

Before selling your life insurance policy for cash, talk to your family members and a certified financial advisor. Examining the pros and cons of selling life insurance can also help you make a wise financial decision about your circumstances.

The main benefit of selling your life insurance policy is to receive a cash payout, which you can use for various expenses. Here are the biggest benefits:

• Immediate Cash Access: You receive a lump-sum payment that you can use for any financial purpose, like medical expenses or other unexpected costs.
• No More Premium Payments: Once you sell a life insurance policy, you’re no longer responsible for paying premiums, freeing up monthly expenses.
• Potential for Higher Offers: If you are older or in poor health, you may receive a better offer with a settlement company, as the buyer gets the death benefit after you pass away.
• Flexibility: Selling the policy provides flexibility in managing your assets if your beneficiaries are financially independent or your financial situation has changed.

Remember that these are applicable if you’re carrying permanent life insurance. If you have term life insurance, it’s generally better to cancel your policy or let it lapse because term policies have no cash value, unlike permanent life insurance.

Exercise caution when looking for the best company to sell your life insurance policy to; not all options are legitimate. Research each company before entering a contract to avoid life insurance scams.

Although life insurance settlements can give you access to a lump sum of money, there are several pitfalls you need to be aware of. Some of the drawbacks of selling your life insurance policy include:

• Challenging Sales Process: Most buyers prefer policyholders with a short life expectancy to receive their payout. If you are young or healthy, you may have difficulty finding an interested buyer.
• Low Returns: Payouts for a life settlement are often lower than the death benefit. They can range from 20% to 25% of the policy’s face value.
• Broker or Settlement Company Fees: Brokers and settlement companies charge fees to help you find a buyer for your life insurance policy.
• Taxable Sale: You may have to pay taxes on the proceeds you receive from the sale of your policy.

Keep in mind that your cash payout may disqualify you from getting public assistance. As always, it’s best to talk to a financial advisor before deciding.

Most people sell their life insurance policies due to expensive premiums or unexpected costs that need quick funding. However, there are ways to address these financial situations without going through the settlement process.

Consider the following options before selling your life insurance policy:

• Use Your Cash Value: If you have permanent life insurance, you can use your accumulated cash value to offset the cost of your premium.
• Get a Personal Loan: Taking out a personal loan may be better than selling a life insurance policy if you need access to cash.
• Take Accelerated Death Benefits: If your policy has an accelerated death benefit provision, you may tap into your death benefit early to cover expenses.
• Take a Loan Against the Policy’s Cash Value: Your permanent life insurance may allow you to borrow money against the total value of your policy.
• Exchange Your Policy: You can swap your life insurance policy for another without paying tax through a 1035 exchange.
• Surrender Your Policy: Depending on your life insurance policy, you may surrender your coverage and receive some cash value as a payout.
• Cancel Your Policy: You may cancel your term life insurance policy to cut your financial responsibility related to the account.
• Convert Your Policy to Whole Life Insurance: If you have a term policy, you may convert it to whole life insurance. This provides lifelong coverage and potentially builds cash value. This conversion can offer continued protection without the need to sell the policy.
• Reduce Your Policy's Death Benefit: By reducing the death benefit, you may be able to lower your premiums, making the policy more manageable without giving up coverage entirely. This reduction can ease the financial strain while maintaining some level of benefit.

Additionally, you can explore various ways to lower your life insurance costs so you won’t have to sell your life insurance policy.

While a life or viatical settlement can give you instant cash, the process can be costly and complex. MoneyGeek answered frequently asked questions about selling your life insurance policy to help you make a wise financial decision.