Selling Your Life Insurance Policy
Most people purchase life insurance when they are looking for a way to guarantee their family’s financial well being in the event of their death. The time may come, when your family thanks you for paying for the life insurance premium. But, the time may also come where you want to cash in your life insurance policy. Life insurance settlements, also known as selling your life insurance policy, are a way to cash out on your life insurance policy. This comprehensive article by Delancey Street will teach you a few basic things.
- How does selling a life insurance policy work
- Options to get money from a life insurance policy before you die
- Examples of situations where you may want to sell a life insurance policy
- How much money can you get from the life insurance settlement
- How to sell the life insurance policy
- Other information and tips before you sell your life insurance policy
How does selling a life insurance policy happen?
Selling a life insurance policy is when a third party agrees to purchase the life insurance policy and the death benefit. The policyholder is agreeing to sell the death benefit in exchange for an agreed-upon sum of funds. The third party buyer then take overs the premium payments, and becomes the beneficiary of the death benefit.
When you sell your life insurance policy, you’re giving up rights to the policy and any benefits.
Here are other terms used to describe selling a life insurance policy(Life settlement, Viatical settlement).
What options do you have to get money from a life insurance policy before your death?
Depending on the type of life insurance policy you have, there are a few options to get your money back from the policy — besides selling it.
Borrowing: You can borrow from your life insurance policy, with tax-free funds, and still retain ownership of the life insurance policy.
Cash surrender: You can cancel the coverage of the life insurance policy in exchange for accumulated cash value for the policy.
Accelerated death benefits: Some life insurance policies give you the option to cash out, or get money, in special circumstances.
Reasons to sell a life insurance policy
There are a few scenarios where selling your life insurance policy is a good idea. Before you decide to take a settlement offer, you should speak to a life settlement professional, and you should speak to your financial advisor, and accountant.
- If you are critically ill, and your policy doesn’t have an option to access the death benefit prematurely, it might make sense to sell the life insurance policy.
- If you are in long-term care, then selling the policy might be a great way to get extra funds you can use elsewhere.
- If you need to fund your retirement, then selling the policy is a way to get immediate funds.
- If you can’t afford to pay your life insurance policy, you may lose it — but if you cash out, you can still retain value.
- If you no longer need life insurance, and don’t have dependents to support, then it might make sense to sell the policy early.
These are just a few general examples, but each situation and family is different. You really must evaluate your situation and act according to your own needs.
How much money can you get from a life insurance settlement eventually?
Here’s a study done by the U.S. Government Accountability office.
- Most policyholders get 4-8 times more than the cash surrender value of the policy
- The payout for life insurance settlements are as low as 13% to 21% of the death benefit value
***It means if you’re selling your life insurance policy early, you might be losing a lot of money potentially.
Here are some factors that determine how much you can sell your life insurance policy for:
- The eventual death benefit value of the policy itself
- Your age
- How much the premium is on your policy, and the total duration of the premiums
The amount of money the seller is going to get should be more than the cash surrender value of the policy, and will be less than the death benefit value of it.
How to sell a life insurance policy
Selling life insurance is regulated. It’s recommended you speak to a professional to help you.
The type of life insurance policy you have, and the premiums on it, will greatly impact your cash out. If you have term life insurance, you may want to find out if you can convert it to universal life, or whole life. When you speak to a potential buyer, you’ll need to provide personal information like medical history, and your health information, in addition to the cash surrender value of the policy, and how many years of premium have to be paid on it.
How selling a life insurance policy work?
To sell the life insurance policy, you need to contact a life settlement company. They will give you an offer based on your age, health, policy, etc. If you sell the policy, you’ll get a payment which is larger than the surrender value – but less than the death benefit.
The buyer takes over the premiums, and will get the benefit when you pass away eventually. Overall, it can take 3-4 months to sell a policy.
It’s possible to sell your life insurance policy for cash, and the transaction is called life settlement. These can be a big risk, if done incorrectly.
Can you sell a term life insurance policy for cash?
Yes, you can definitely sell a term life insurance policy for cash. If the policy is convertible into permanent life insurance – it is definitely possible. A term life policy lasts for a period of time. If you pass away within that time period, the beneficiary gets the death benefit. If you outlive it, the policy will end at the end of the term. Permanent life insurance doesn’t have a set term. That means the policy will remain in effect for the remainder of your life (and as long as the policy is paid for).
When you purchase a term policy, you have the option to one day add a conversion rider. This “conversion ride,” makes a term life policy into a permanent life policy.
In order to sell a term policy, it must be converted into a permanent policy. If you have a convertible policy, your health will not be re-evaluated when you convert it into a permanent life insurance. The conversion riders can have age, or time limits on it, within which period the conversion can occur.
Am I eligible for selling my life insurance policy?
Both permanent and term policies can be sold. It’s important to know that there are certain eligibility requirements. If you don’t meet these requirements, it’s unlikely a settlement provider will purchase the policy.
Age and health are important. Most people who sell their policies are 65+ and have serious medical conditions.
The policy type is also very important. People with universal, whole, and convertible term policies are good candidates for life settlement.
Another important factor is the policy size. The policy should at least be $200,000 in value.
Major reasons why people sell their policies
Many people sell the policy because receiving cash immediately is more important than the future value. Here are some popular reasons why people sell their life insurance policy prematurely.
You have no beneficiary: If you took the policy and had dependents, and those dependents are no longer around – then this is a great reason.
You are overinsured: If you have multiple policies, you may no longer need one of them.
You can no longer afford them: If you can no longer afford expensive policies, then selling it is a great way to get some spending money.
How much money can I get when I sell my life insurance policy?
The amount of money you get will depend on the death benefit, the cost of the premium, and the life expectancy. Life settlement providers look at a lot of factors to determine how much it’ll cost to keep the policy active.
Size of the benefit: The larger the benefit, the larger the payout.
Cost of the premium: When you sell the policy, the purchaser is going to keep making the premium payment. If the premium is low, compared to your death benefit, then the payout is going to be more substantial.
Life expectancy: This is another important factor. Policies are worth more to life settlement companies if the policyholder has a short life expectancy. If the policyholder passes away sooner, the purchaser has to make fewer payments before getting the death benefit. To estimate this, the life settlement provider will collect medical records via HIPAA release forms. With these medical records, the life settlement provider will do medical underwriting to estimate the life expectancy of the owner.
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