Why Do People Sell Their Life Insurance Policies?
Are you thinking of selling your life insurance policy due to expensive premiums? Do you want to discontinue it because you no longer have financial dependents?
The act of selling your life insurance coverage is referred to as a life settlement. In fact, a life insurance policy is considered “real property,” and you can sell it to a third party for cash. The buyer will then continue to pay the premiums, and he/she will get the death benefit in the event of your death.
So, if you’re planning to sell your life insurance coverage, here’s everything that you need to know about the process.
How Selling a Life Insurance Policy & Life Settlement Works?
It’s rare to find an individual who may want to purchase your life insurance coverage. But there are life settlement companies and brokers who might be interested in buying it.
You have more chances to sell your life insurance policy if you’re 65 years old or above. The truth is that the sooner you’re likely to die, the more interested these life settlement companies and brokers are in buying your life insurance policy.
Once you find a life settlement company or broker, you’ll have to provide details about your medical records and your life insurance. Then, when the buyer pays you in exchange for your insurance policy, you’ll stop paying premiums anymore. But it’s the buyer (not your dependents) who will receive the death benefit that comes with the life insurance policy.
Then, you’ll have to get in touch with the new policy owner to confirm that you’re still alive. You can discuss with the life settlement provider or broker how this should be worked out.
Typically, the new policy owner will send you a document that you’re required to sign and return to confirm that you’re still living.
Life Settlement Companies
You can find a lot of life settlement companies that might be interested in buying your life insurance policy.
Here’s a list of the life settlement providers that you should consider:
- Ovid Life Settlements
- Coventry Direct
- Magna Life Settlements
- Life Equity
- Harbor Life Settlements
- Life Policy Solutions
- Windsor Life Settlements
- Berkshire Settlements
- Abacus Life Settlements
- Genesis Life Settlements
Who Qualifies for a Life Settlement?
Perhaps you now have an inkling that life settlement companies are generally interested in buying life insurance policies that are advantageous to them. They typically pick those policies from people who have low life expectancy so that they can collect the life insurance death benefit sooner. Otherwise, they will continue to pay the premiums while the original owner is still alive.
You’re likely to sell your life insurance coverage if you’re 65 years of age or older. You must also be a permanent resident in a country (for this instance, the United States of America) since the life settlement company will have to continually check with you if you’re still alive.
Life settlement companies are also more likely to buy a policy with a death benefit of $100,000 or more. The more valuable your policy, the higher the offer you get. You also have more chances to sell your life insurance coverage if you have a chronic or terminal illness. That’s why you have to provide your medical records when selling your policy.
Can I Sell My Life Insurance Coverage for Cash?
Yes, it’s possible to sell your life insurance coverage. But the amount you’ll receive is lower than the death benefit. Before you offer up your policy for sale, it’s a must to read the terms and conditions if you’re indeed allowed to sell the insurance policy.
Some life insurance providers prohibit owners from selling their life insurance coverage.
Why Do People Sell Their Life Insurance Policies?
One of the reasons why people sell their life insurance policies is expensive premiums. That could be because they just can’t afford to continue paying the costs of the policy anymore. Also, some people decide to sell their life insurance coverage to shoulder immediate financial emergencies, such as payments for medical treatments or bills.
It’s also an excellent choice to sell your life insurance policy if you don’t have any financial dependents anymore. If you’re a divorcee or you have children who are now financially independent, you can sell the policy since you no longer have dependents who rely on the death benefit of the life insurance policy.
How Much Cash Can I Get?
Of course, not all life settlement offers are equal. The amount that you’ll receive when selling your life insurance policy will also depend on the face amount of your policy.
Some life settlement companies may give you 25 to 50 percent of your policy face amount. So, if you’re covered for $100,000, you can sell the policy for $25,000 or $50,000. You also have to pay for fees and income taxes or capital gains if you successfully sell your life insurance coverage.
What Should People Ask Before Selling Their Life Insurance Policy?
Yes, a life settlement can be advantageous on your part. But make sure to ask yourself these following questions before deciding to sell your life insurance policy.
- Do I Still Need Life Insurance Coverage? It’s better to keep the insurance if you can afford to pay the premiums, and you still have financial dependents.
- What are the Alternatives to Pay My Premium? If you think paying for your premiums is a financial burden already, you can take out loans from the policy or reduce the death benefit in exchange for a lower premium.
- Is the Buyer or Broker to Be Trusted? Make sure that your life settlement provider or broker has a license because it’s one of the proofs that you’re going to have an excellent transaction.
FAQ about selling life insurance policies
A life settlement is when you sell your life insurance policy to a third party for cash. The third party is typically another buyer or broker who will continue to pay the insurance premiums; they will get the death benefit when you pass away. Life settlements used to be known as a viatical settlements.
The amount of cash you'll be offered will depend on several factors such as your age (life expectancy), the benefit amount of your life insurance policy, and how much the third party buyer will have to pay in premiums while you're still alive. This is why the older you are the more cash you can expect when you sell your policy.
People who want to sell their life insurance policy typically are over the age of 65. However, people younger than 65 may be able to qualify based on their health status. According to LISA (Life Insurance Settlement Association), people with specific medical conditions may qualify.
Tax-advantaged retirement accounts or lowering your death benefit of your life insurance policy are two alternatives to selling your policy.
Not every life insurance company or policy will allow you to lower your benefit amount. However, if you have a few dependents and you're older, it could keep your policy active and save you money.
With tax-advantaged retirement accounts (think Roth IRA) also provide a high rate of return. You are able to begin withdrawals penalty free about 6 years prior to being eligible to sell your insurance policy. Another benefit is that unlike your life settlement option, when you make withdrawals from your Roth IRA during retirement, you will not pay taxes on the payout.
Life insurance isn't like car insurance, as it isn't required that you own it -- it isn't mandated by law. Selling your policy makes sense in a few situations.
Life settlements are great if you don't have anyone who relies on you financially (dependents). Perhaps you had dependents, like children, who have grown and are now independent financially.
Some other common situations are people who are recently divorced or business parters who are no longer in business together. When there are no dependents who is in need of your death benefit, then a life settlement is something to consider.
The first step when selling your life insurance policy is to find a buyer. The most common situation is to find a life settlement company or broker to sell your policy to.
Do I still need life insurance coverage? Can you afford your insurance premiums and do you have dependents who still rely on your financial support? If you do then you should consider keeping your policy.
Premium payment options? If your life insurance premiums have become too much, there are some options that may be available. First, depending on the type of policy you have, you might be able to take loans from your insurance policy or reduce the death benefit that can lower premiums.
Is the broker or buyer trustworthy? Make sure the broker is licensed in your state's department of insurance. Don’t use buyer or broker who wants to rush you into a decision.
Typically, a Universal life insurance policy is preferred and face amount of $100,000 or more is the most desirable. However, term life insurance and smaller policies can also be used for life settlements says, LISA.
Pros and Cons of Selling Your Life Insurance Policy
There are advantages and potential pitfalls when selling your life insurance coverage. Read on below.
- Access to much-needed cash
- You’ll no longer have to pay premiums
- You’ll get a lump sum payment that’s bigger than your policy’s cash surrender value
- You’ll have to pay transaction fees
- The amount you’ll receive may be taxable
- Your financial dependents won’t receive the death benefit of the policy
Some folks decide to sell their life insurance policies for a lot of reasons. In such a case, it’s crucial to know how life settlement works and whether it’s right for your financial situation. Make sure to know the pros and cons of selling your life insurance coverage before making a decision.
About the Author: Bree Diaz is a writer and an aspiring financial advisor. She writes varying topics about finance like debt and finance management, personal finance, credit repair, etc. She browses sites like SiFinances.com, Investopedia, Forbes and The Balance for her references. When she has some spare time, she travels to different countries with her friends to discover some amazing culture and traditions.