Is Selling Your Life Insurance Policy A Good Idea?
Find out if you can sell your life insurance and whether it’s the right choice.
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Selling your life insurance can be an excellent way to get extra cash, especially if you’re in a dire financial situation.
However, there are some circumstances when selling your life insurance policy to another person is a smart financial move.
This article will cover everything you need to know about selling your life insurance, including how much you’ll be able to get for them and alternatives to look into if you’re considering selling your life cover.
Can I Sell My Life Insurance?
Depending on the type of life insurance you have, you may be able to sell your policy to someone else. This is known as a life settlement, and there are even companies that specialize in finding and buying life insurance plans from people.
Having this option available to you can be a benefit depending on your circumstance. LIRA estimates that nearly $100 billion of face value life insurance are lost each year because people over 65 let their policies lapse once they become unaffordable. Life settlements are an excellent way of:
Getting cash
Reducing your costs for coverage you might not need.
Consolidating your finances when you retire.
In some cases, selling your life insurance is necessary, especially if you’ve fallen on hard times and can’t maintain payments.
Term vs Permanent Life Insurance
Brokers prefer permanent life insurance policies over a term life insurance policy because they have higher death benefits.
Term life insurance is temporary life cover that lasts for several years. Once the term of the contract expires, coverage ends. You can typically buy 5, 10, and 15-year contracts.
Permanent life insurance is coverage that will last until you die or stop paying premiums. There are three main types of permanent life insurance, universal, variable, and whole life cover.
This doesn’t mean you won’t be able to sell your policy if you have term cover. Our advice is to check with a few life settlement companies to see if they’ll buy your policy and what price you can get for it.
Once you sell your life insurance, you’ll sign over the death benefit to the new owner, who will take over monthly premium payments and pay you a lump sum amount for the contract.
You’ll have to notify your insurance company about the changes and fill out a new assignment form that states the death benefit will go.
When you die, your policy's death benefit, or face value, will be paid out to the new owner of your coverage and your beneficiaries won’t receive any money.
What is the face value of a life insurance policy?
The face value of an insurance contract is the value that will be paid out to the beneficiary once the policyholder has died.
For example, if you take out life insurance for $250,000 of coverage, that contract's face value or death benefit will be $250,000.
Source: Pexels
Who Buys Life Insurance?
Anyone can buy a life insurance policy from another person, and these transactions are usually facilitated through a broker or life settlement companies.
Steps to Selling your Life Insurance Policy
Find a broker or company that specializes in life settlements.
Get them to find a buyer.
Sell your policy.
Buyers are looking for policies that have high returns on their investment. This means that policies owned by older people are considered to be of a higher value than those owned by younger people.
This is because the policy has matured, the death benefit is considerably more, and the possibility of the policyholder dying in the next 20 - 30 years is higher.
Brokers and buyers prefer plans with flexible payment terms to settle the policy as quickly as possible.
Companies and brokers involved in life settlements usually take a commission for the sale when they find a willing buyer for a life insurance contract. This may affect the amount of money you get for your policy.
Source: Pexels
Tips for finding a life settlement company
1) Shop Around: There are many life settlement companies out there. Phone a few and see what they can offer you.
2) Look at Reviews: Go online and research what past customers have said about their services.
3) Find out if they’re affiliated with LISA: The life settlement Association is a professional organization that advances standards of practice and professionalism in the life settlements industry. See if your preferred provider is affiliated with them.
4) Verify their track record: Check with your local state insurance department to see if the person you’re dealing with has any complaints against them.
What Types Of Life Insurance Do People Buy?
Brokers prefer specific policies over others. Here are some of the factors they’ll consider when choosing a life insurance policy to buy.
Age: Brokers and life settlements firms will generally look at the policyholder's age before they decide to sell a policy to another person. The preferred age is over 65, increasing the potential return on investment for their buyers and themselves.
For example, let’s say a 45-year-old female wants to sell their permanent life cover. The average life expectancy of a woman is 85 in the US. This means that the new policyholder might have to wait 40 years before seeing a return on their investment.
Health: If a person is in poor health, their life insurance policy may be worth more even though the person is younger.
This is because the risk of them dying is higher because of their health condition. For the buyer of the life insurance policy, they’ll be paid the death benefit sooner.
Policy Value: Higher policy values can solicit higher bids from potential buyers. A life insurance policy worth $100,000 would be worth more than a plan worth $50,000 to a person interested in purchasing a plan.
Financial Security: Buyers often look at the financials of the life insurance company that you have the contract with. If the company has a poor financial track record, there may be a chance that they won’t get the death benefit when you die.
Why Do People Sell Their Life Insurance?
There are many reasons to sell your life insurance, and in some cases, it makes sense to sell it than keep paying it as you age.
Cashflow Problems: Some people don’t have other means of getting it with a loan or through family and friends. Selling a life insurance policy can provide money quickly if you need it now.
No dependents or financial debts to cover: If you don’t need life insurance anymore, then paying a monthly premium might seem like a waste of money. Some people decide that they would like to use that money in retirement instead of paying premiums.
Monthly premiums: If you’re on a limited budget in your retirement and don’t want to pay for life insurance, selling your policy is an option.
The Pros And Cons Of Selling Your Life Insurance
| Benefits | Downsides |
|---|---|
| You don’t have to worry about premiums anymore. | Commissions can take some of the value away. |
| You get a lump-sum payment that you can use while you’re alive. | Determining a fair price can be hard to do. |
| You may have to pay taxes on the money you receive from your life insurance. | |
| If you have dependents, they won’t receive a death benefit when you die. |
Source: Pexels
Tips For Selling Your Life Insurance
Know the Worth of your Policy: Speak to your insurance company and understand what your policy is worth based on the premiums paid, the face value, your age, and your health status. Then based on this, decide whether you’d like to sell your policy or whether there are other alternatives you can look into.
Find reputable brokers and life settlement firms: Some life settlement companies aren’t reputable so do your homework before you settle on a provider. A good way of finding reputable life settlement companies is to look for reviews online.
Get multiple offers: There are many life settlement companies out there, so shopping around is in your best interest. Some companies may have better rates or offer faster turnaround times.
Have all of your paperwork in order: If you’ve managed to find a willing buyer for your policy, the last thing you want is to delay the purchase because you’ve misplaced your policy, medical records, and other important documents. Make sure you have everything to sign the deal and get paid.
Alternatives To Consider Before You Sell Your Life Insurance
If you’re selling your life insurance policy for financial reasons, be sure to look at the alternatives before deciding. Other options you can use to keep your life coverage.
Reduce your death benefit: If you have a universal life insurance plan, you may be able to change your coverage to reduce your monthly premiums.
Accelerate your death benefit: If your life insurance policy has an accelerated death benefit rider, you’ll be able to get a portion of your death benefit if you are chronically ill or under other specific circumstances.
What is an Accelerated Death Benefit Rider?
A rider is an additional term that you can add to your life insurance that adds to your coverage when specific events happen.
One such rider that you can add is an accelerated death benefit. This rider is triggered by catastrophic events or illnesses and allows you to withdraw a certain percentage of your death benefit before you die.
Cancel your policy: If paying your premiums is an issue and you wouldn’t like to sell your policy, you can always cancel it or let it lapse.
Surrender your policy: Some life insurance plans have a cash surrender value that you can get if you decide to end your coverage. You’ll need to check with your insurance company to find out what this amount is, but generally, it’s the total value of all the premiums you’ve paid for your insurance. At the same time, you covered less any administration fees.
Loan money and use your life insurance as collateral: If you have a permanent life insurance policy, some lenders will let you use your life insurance as collateral for the loan. Typically, you’ll have to go through a collateral assignment process.
Use your cash value to reduce premiums: If you have a permanent life insurance policy, you may be allowed to use your cash value to reduce your premiums.
Loan money against your cash value account is slightly different from the point we’ve covered already. You’ll be borrowing money directly from your insurance company with cash-value loans, and your policy will be used as collateral.
Any loaned money that hasn’t been paid back will be deducted from your death benefit when you die.
Source: Pexels
Where Can I Learn More About Life Insurance?
Life settlements aren’t something that most people want to do, but if you’re interested in doing remember to shop around, find a reputable company, and do your research on buyers before you commit.
If you’re interested in learning more about life insurance, visit our Life Insurance Hub today to find our latest articles and guides.
We also have a team of expert insurance agents to assist you with finding life insurance policies in your area. If you’d like to compare your option, use our free quote comparison tool or reach out to us at 1-888-912-2132 or help@policyscout.com today.