How to Sell Your Life Insurance Policy

Mar.26.2021

Do you own a life insurance policy? If so, perhaps you’ve wondered if you can sell it. The good news is yes, you can. You just need to know the process to get it done.  In a nutshell, you will contact a third party, licensed life settlement company so that you can get an offer to buy your policy. 

The offering price will be based upon your age, health, and policy value. If you sell, you’ll receive a payment that’s larger than the cash surrender value. Once the third party takes over your premiums, they will receive the death benefit when you pass on. Although this conversion process usually takes around three to four months, more well-established life settlement companies will start paying you in as little as one week.

That’s the short explanation of how to sell your life insurance policy. Here follows a guide that will help you go through this process every step of the way.

Qualifying to Sell Your Life Insurance Policy

People that are 65 years old or more are typically the best candidates when it comes to converting a life insurance policy into a life settlement. Also, the policy’s face value should exceed $200,000.

The next step is to determine what type of life insurance you own. Generally, universal (also known as whole) life insurance policies are the simplest kind of policies to convert into life settlements. However, that doesn’t mean you will not be able to cash out other types of policies, such as term life insurance. To understand why this type of policy is more difficult to convert than a universal policy, you must know the difference between the two of them.

The Difference Between Universal and Term Life Insurance

A term life insurance policy only lasts for a particular amount of time. If you pass on during that specific time frame of the term policy, the beneficiary receives your benefit.  However, if you pass on beyond that time frame, the policy has ended and therefore the beneficiary would not be eligible to receive the benefit. By contrast, permanent (also known as universal or whole) has no term limit, which makes the insurance valid for the rest of the policyholder’s life—if the policy payments are paid up.

If you happen to have a term life insurance policy, don’t fret. These policyholders usually have the choice to opt for a conversion rider, which is a clause that makes the term policy convertible into a permanent life insurance policy. 

The benefit of having a conversion rider is that you won’t need to have your health re-evaluated to qualify for a life settlement. The downside is that some term life insurance policies have age deadlines as to when the conversion can take place. That means you must check your policy or call your insurance broker to find out if your policy is convertible and if so, what the time limits are to convert it. The key takeaway here is that you simply cannot sell your term life insurance until you first convert it into a universal life insurance policy.

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Eligibility Requirements

As stated before, certain eligibility requirements need to be met to receive a life settlement, if you don’t meet these requirements, it’s unlikely that settlement providers will be willing to work with you. The most important life settlement eligibility factors are as follows:

  • Age and health: Most of the people that sell their policies are 65 years old or more and have a significant medical condition.
  • Type of policy: Universal and convertible term policyholders are both excellent candidates for a life settlement.
  • Policy size: The prevailing policy should have a minimum of $200,000 in face value.

In short, to be eligible to sell your life insurance policy, you should be at least 65 years of age and have a significant medical condition as well as on a permanent or convertible policy that has a face value of $200,000 or more.

Reasons to Sell Your Life Insurance Policy

One of the main reasons people sell their life insurance policy is because they would rather receive cash when they’re alive rather than leave a benefit to someone after they die. Their motivation can range from wanting the extra cash to upgrade their lifestyle to matters of necessity, such as paying for long-term care. Here are some of the foremost reasons why people decide to sell their policies:

  • You are over-insured: If both you and your spouse have high-premium policies, it might not make sense to pay for both–especially if your insurance coverage is more than what’s needed for a beneficiary to live on.
  • You no longer have a beneficiary: You could have taken out a policy when you had children that were dependent on your income. But now, they are grown and financially independent.
  • Premiums have become too expensive: If premium payments have become both unnecessary as well as unaffordable, selling the policy is a good way to cut down on expenses.
  • Your term life insurance policy is about to expire: When a term life insurance policy is close to ending, you’ve got some decisions to make. You need to act a minimum of six months before the policy ends. Ideally, you’ll have a conversion rider so you can convert it into a life settlement. Just remember, you don’t want it to expire before you have a chance to consider other options.
  • Your beneficiary is now financially independent, and you could use the cash: There comes a point when the original purpose for having life insurance no longer exists.  If that’s the case, perhaps you want to redirect that money somewhere else,

How Much Is My Life Insurance Worth?

Once you decide to sell your life insurance, the amount of cash you’ll receive from a life settlement payout depends on how big the benefit is, how much the premiums are and how long the insurer is expected to live. 

Life settlement providers check out these factors to work out what proportion it’ll cost to maintain the policy and what they are going to receive once the policyholder passes on.  Providers use a mathematical equation to figure out the quantity they must pay the policyholder so they can still receive enough of a return on the policy. Let’s walk through all those factors to ascertain how they influence a policy’s valuation:

  • The Benefit Size: The more the benefit, the more the payout is going to be.  Know that the purchaser will always be willing to pay if they will get a greater return on investment once you pass away.
  • Premium Cost: The purchaser continues to pay premium payments after you sell them the policy.  If you had low premium payments compared to your benefit, the payout to the purchaser is going to be more substantial.
  • Policy Life Expectancy: The fact of the matter is, policies are worth more to life settlement companies when the policyholder has a shorter lifespan. The rationale is that if the insured passes away sooner rather than later, the purchaser will need to make fewer premium payments to receive the benefit.

To get a rough idea of how long the insured is expected to live, life settlement providers gather medical records through Health Insurance Portability and Accountability Act (HIPAA) release forms. Through an underwriting estimate, they can anticipate the policyholder’s approximate life expectancy. Before the provider can do this, they must obtain permission from the policyholder to run these projections. 

The Benefits and Liabilities of Selling Your Life Insurance Policy

When deciding to choose whether to sell your life insurance, it’s always best to weigh the benefits against the liabilities so you can make an educated decision:

Benefits 

  • The immediate payment you receive for a life settlement is larger than the surrender value of your policy. 
  • When you sell your policy, you do not need to make premium payments. 
  • You can use the cash you’re not spending on premiums however you wish. 
  • You will have extra money to enjoy your retirement.

Liabilities

  • Upon your death, your beneficiaries won’t receive anything. 
  • You risk not being eligible for Medicaid. If you have a permanent life insurance policy, you are probably already not eligible for Medicaid anyway. That’s because you can’t have more than $2,000 in assets and your life insurance policy is considered an asset. 
  • While most life settlements are tax-free, portions of the proceeds could be taxed.

Frequently Asked Questions About Selling Your Life Insurance Policy

Is it legal to sell my life insurance policy?

Selling a life insurance policy became legalized under the Supreme Court back in 1911. Because it is considered an asset owned by the policyholder, it’s legal to sell your policy to a third-party.

How do I know if I qualify to sell my life insurance?

Generally, if you are 65 years or older, you own a policy of $200,00 or more and your health has declined, you are an excellent candidate to sell your life insurance policy.

How do I find a reputable broker?

Ask an independent advisor for recommendations or, you can go online and look for good reviews. Make sure to ask about their experience, how their process works and what their fee structure is.

How can I sell my life insurance policy more easily?

Do your homework and know what type of policy you have, how much your coverage is, and what the face value is in the account. Make sure you are working with a licensed or reputable broker. Round up your paperwork and keep in mind the first offer may not always be the best offer.

How can I sell my life insurance policy safely?

Avoid solicitations from life settlement companies and rely more on recommendations. If brokers are required to be licensed in your state, verify their credentials through your state insurance department. Also, if you get multiple offers you will have a better sense of your policy’s true worth.

How much can I get for my life insurance policy?

Payouts are determined by several factors, including age, the state of your health, and the value of the policy. Each case is different, so there is no uniform standard for what payout you will receive.

How long will it take to sell my life insurance policy?

On average, it takes three to four months to sell a life insurance policy. It is also contingent upon the number and quality of offers you receive. If you take the first offer and accept it without shopping around, it could only take a month.

Are there rules about how I spend the cash once I sell my life insurance policy?

That depends upon if your policy is converted into a life settlement or a viatical settlement. If it’s a life settlement, you can spend the money on whatever you wish. If it’s converted into a viatical settlement, however, you are restricted to spending the money on out-of-pocket medical bills and other related healthcare needs.

Know Your Options

While it is always a good idea to consult a financial advisor before selling your life insurance policy, at the end of the day, you know your circumstances better than anyone else. Just remember that your policy is an asset, and you owe it to yourself to let that investment work in favor of your best interests as you see fit.

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