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Many people buy life insurance when they are young so that their families will be protected if they die prematurely.
When they get older, they may not need the coverage anymore, but they don’t want to cancel the policy after they’ve paid all those years of premiums. So they may wonder if they can sell someone their policy.
In many cases, they can, but there are a few things to carefully consider before doing so.
Find out more about selling your policy below and make sure to compare rates above with our free comparison tool!
Reasons for Selling a Life Insurance Policy
The first thing to do if you are considering selling a life insurance policy is to think very carefully about why you want to sell. You may feel that you no longer need the coverage, which is a valid reason to sell.
But you should be very sure that you don’t need the coverage because if you sell an older policy and then decide you want a policy after all, it will be far more expensive to get a new policy. Depending on your age and health, you may not be able to get another policy.
Perhaps you are considering a sale of your life insurance policy because your savings have been depleted over a long retirement and you can no longer afford the premiums.
This is also a valid reason for selling a policy, but be sure you understand the implications of a sale.
If you are eligible for public assistance such as Medicaid, a lump sum from the sale of a life insurance policy may reduce or eliminate your eligibility. In other words, you may no longer get Medicaid benefits because you now have too much money to qualify.
Another good reason to consider a sale of your life insurance policy may be because you have a critical or terminal illness and your doctor tells you that you may not live much longer.
You want to raise the money to pay your medical expenses. In this case, call the company you bought the policy from before you commit to selling it.
Some life insurance policies have a provision for critical or terminal illnesses. If yours does, it means that you may be able to take some of the death benefits while you are still alive and use it to pay your medical expenses.
For example, if you have a $100,000 policy with a critical illness rider, you may be able to use $50,000 to pay your medical expenses, and your heirs will still get the remaining $50,000 when you die.
What Happens When You Sell a Life Insurance Policy
Buying unwanted life insurance policies is big business. There are brokers who will shop your policy around to try to get you the best price, and there are companies who may purchase your policy directly.
These companies often use terms such as ‘life settlement’ or ‘senior settlement’ to describe the process of buying your policy.
You may also hear the term ‘viatical settlement‘ which typically refers to the purchase of a life insurance policy of someone who is terminally ill.
It’s important to understand that when you sell your life insurance policy, you will get less than the face value, or death benefit, of the policy — sometimes a lot less.
The reason for this is simple: the company or investor who buys your policy is paying you now and will have the continued obligation of your premium payments, in exchange for the payment of your death benefit at some unknown time in the future.
If you are relatively young and in good health, the new owner of your policy could be waiting twenty or thirty years to see any return on their investment.
Before you will get an offer for your policy, you will have to provide a copy of the policy and a recent copy of your medical records. The broker or company will want to determine how healthy you are, so that they can make an estimate as to how long you are likely to live.
They will then consider how much they are likely to have to pay in premiums, add in the broker’s commission as well as a reasonable return on investment for the new owner, and come up with an offer for your policy.
In other words, according to the Life Insurance Settlement Association, the amount you will get for your policy depends on four factors:
- The policy’s death benefit, sometimes called the face value
- The premiums
- Your life expectancy
- The rate of return the investor requires
If your policy has cash value, you will always receive more than the cash value when you sell your policy in a life settlement arrangement. You will always receive less than the death benefit.
If you decide to sell your policy, you can sell it to a broker, who will in turn sell it to an investor, after taking a commission. You can also sell it to a life settlement company or an individual investor.
Once you complete the sale of your policy, the new owner will change the beneficiary of the policy to him or herself or their company. They will then pay the premiums on the policy as long as necessary.
When you die, the death benefit will be paid to the new owner, or whomever they have named as the beneficiary.
You have no further connection with the policy, except that it covers your life, and your death triggers the payment of the death benefit.
It’s important to understand that once you sell your policy for an agreed-upon price, you and your heirs no longer have any claim to the value or the proceeds of the policy.
This means that if you sell your $100,000 policy for $50,000 and you die three days later, you do not get any additional money beyond the $50,000 you sold the policy for.
By the same token, if the company who buys your policy expects you to die within a year, and you live another twenty years, they have to continue to the pay the premiums for those twenty years if they expect to collect the death benefit.
As with any financial transaction, it’s important to do business with someone you trust when you are considering selling your life insurance policy.
The Financial Industry Regulatory Authority, FINRA, recommends that you understand the advantages and disadvantages of selling your policy, investigate any company you are considering doing business with, consider the alternatives to selling your policy and evaluate the impact on your finances and on your heirs before you make a decision.
If you are concerned about your ability to make an informed decision due to your age or cognitive ability, ask a trusted family member or adviser to help you.
Life settlement agents and brokers are required to be licensed to sell insurance in the states in which they operate. You can verify this through the office of your state insurance commissioner.
Alternatives to Selling Your Life Insurance Policy
There may be other ways to achieve the objective you’re trying to reach by the sale of your policy. Consider these before you make the decision to sell.
If your policy is a permanent, as opposed to term, policy, it may have cash value. Whole life and universal life insurance policies are permanent policies which build up cash value.
If your policy has cash value, you may be able to borrow against or withdraw some or all of it to help with your expenses. If you do this, the insurance company will subtract from the death benefit the amount of any outstanding loans when you die.
For example, if you have a universal life insurance policy with a death benefit of $100,000 that has $20,000 in cash value, you may be able to borrow or withdraw $15,000 while you are still living.
If you die before the loan is paid back, your heirs will receive an $85,000 death benefit when you die.
It may also be possible to use the cash value to pay the premiums on your insurance policy. Rather than paying the premium every month or every year from your income or savings, you could use the cash value to pay it.
Some whole life policies are specifically designed to reach the point where they effectively pay for themselves.
Another option to consider if the premiums are a burden is to transfer ownership of the policy to your beneficiaries and have them continue to pay the premiums.
If your children are your beneficiaries, they might prefer to pay a few thousand dollars in premiums and still receive a death benefit of $100,000 or more when you pass away.
Whether you sell your policy to a settlement broker, or sell or transfer it to your heirs, your actions may have tax implications. The cash value or accumulated value in an insurance policy may be treated as interest income if you receive it as opposed to your beneficiaries.
Life insurance proceeds are generally passed to beneficiaries free of Federal income tax. Before you sell or transfer your policy, consult a tax advisor to determine what the consequences may be.
Selling your life insurance policy may provide needed financial relief for senior citizens who struggle to pay increasing medical and other costs.
But these are complex transactions, and should not be entered into lightly. Educate yourself and seek advice from trusted advisors if you need it, so that you can make an informed decision regarding your life insurance policy.
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