How to sell your life insurance policy
Looking to sell your life insurance policy? Whether the policy no longer fits your needs or you are looking for ready cash for medical bills, debt payments or other needs, it is possible to sell your policy — term or permanent. In this guide on how to sell a life insurance policy, Bankrate’s insurance editorial team took a careful look at insurance laws and industry standards to help you decide if selling your policy is the right choice for you—and if it is, how you go about it to maximize your return.
Can I sell my life insurance policy?
If your life insurance policy no longer serves its original purpose, selling it might be a practical way to free up funds. While many policies can be sold, permanent life insurance, such as whole or universal life, is usually more sought after in the secondary market. These types of policies are often more attractive to buyers because they build cash value over time, offer a longer coverage duration and guaranteed benefits.
That said, if you have a term life policy, don’t rule out the possibility of selling it. In some cases, term policies can be sold if they include a conversion feature that allows them to be converted to permanent coverage. Additionally, term policies may be marketable if the insured is terminally ill, as the policy’s payout could be more immediate.
According to Harbor Life Settlements, many states require you to own the policy for a set number of years — usually between two and five — before you can legally sell it. However, these waiting periods are regulated by each state and can vary based on where you live. Knowing these requirements ahead of time can help you better plan and assess whether selling your policy aligns with your needs.
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Whole life insurance combines life insurance with an investment component.
- Coverage for life
- Tax-deferred savings benefit if premiums are paid
- 3 variations of permanent insurance: whole life, universal life and variable life include investment component
Term life insurance is precisely what the name implies: an insurance policy that is good for a specific term of time.
- Fixed premium over term
- No savings benefits
- Outliving policy or policy cancellation results in no money back
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How to sell your life insurance policy
Selling your life insurance policy can be a strategic way to unlock financial value, but it’s important to understand your options. There are two primary paths: a life settlement and a viatical settlement. Both allow you to sell your policy, but they’re designed for different situations and offer varying payout amounts depending on your policy type and health condition. Here is a breakdown of each option:
-
Life settlement:
- Typically for policyholders aged 65 or older who are experiencing health decline.
- Best suited for permanent policies that accumulate value over time and are in higher demand.
- Term policies can sometimes be sold, especially if they’re convertible to permanent coverage or if the insured is terminally ill. However, offers may be lower.
- In a life settlement, you usually receive more than the policy’s cash surrender value but less than its full death benefit. This is because the buyer takes over the policy, including future premium payments, and expects a return, so they offer a price that’s profitable for them but higher than what you’d get by surrendering the policy.
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Viatical settlement:
- Specifically for those with a terminal illness and a life expectancy of less than 24 months.
- Generally offers a higher payout since buyers expect to collect the death benefit sooner.
- Payment amounts are regulated by state laws, ensuring that terminally ill individuals receive a fair percentage of the policy’s value.
When it comes to viatical settlements, most states follow specific guidelines that determine how much you can receive based on your life expectancy. Below is an example of how Minnesota handles viatical settlements:
| Life expectancy | Minimum payout as % of face value (minus outstanding loans) |
|---|---|
| Less than 6 months | 80% |
| 6 months to less than 12 months | 70% |
| 12 months to less than 18 months | 65% |
| 18 months to less than 24 months | 60% |
| 24 months or more | 50% |
4 tips for selling your life insurance policy
Selling your life insurance policy is a big decision, and getting the most value out of it requires careful planning. Before diving into the process, it can be helpful to understand how it works and what you can expect. Start by reviewing the type of policy you have because, as we mentioned, permanent policies are more commonly sold. Take note of your coverage amount, the policy’s cash value and any other details that could impact its marketability. Additionally, familiarize yourself with your state’s regulations regarding life settlements, including any waiting periods or restrictions.
While all this can feel overwhelming, following the right steps can help you secure the best possible deal. Here are four tips to guide you through the process and maximize your payout.
1. Consider hiring an independent advisor
If you’re unsure about what your policy is worth or the tax implications involved in selling it, hiring an independent advisor could be a smart move. An advisor with expertise in life settlements can provide an accurate appraisal of your policy’s value, help you understand potential tax consequences and offer guidance throughout the process. Their objective insights can be especially valuable if you’re new to life settlements and want to make sure you’re starting the process on solid ground.
2. Find a reputable, licensed broker
While a life settlement broker may charge a fee, they can often help you get the best possible offer by finding the highest bidder. Brokers typically operate in an auction-style environment, where they seek out multiple buyers and negotiate on your behalf. Their commission is often tied to the sale price, and they have a fiduciary duty to work in your best interests, meaning they’re legally required to put your needs ahead of their own when advising you.
By comparing several brokers, you can find one who is licensed in your state, offers fair commission rates and is transparent about fees. Once the broker finds an offer, you’ll have the option to accept or decline it based on your comfort level.
3. Get multiple offers
If you’d rather not use a broker, you can go directly to life settlement providers — companies that purchase policies without a middleman. While this might save you from paying broker fees, it could also mean receiving a lower offer since there’s no competitive bidding process. To make sure you’re getting a fair deal, it’s important to reach out to multiple providers and compare their offers. By doing this, you can increase your chances of securing a better price and avoid settling for less than your policy is worth.
4. Round up your paperwork
The selling process involves more than just your life insurance policy; your medical history plays a key role, too. Potential buyers will require access to your medical records to accurately assess your policy’s value. Be prepared to sign a release granting the broker or provider permission to obtain these records. This step can be time-consuming and may involve some out-of-pocket costs, but it’s a necessary part of the process. Having all your paperwork organized in advance can help things move more smoothly and prevent delays.
Tax considerations when selling your life insurance
Selling your life insurance policy can give you access to extra cash, but it’s important to understand the tax implications. Depending on the type of settlement you choose, whether a viatical settlement or a life settlement, the tax treatment differs and can affect how much money you actually take home.
If you’re terminally ill and qualify for a viatical settlement, there’s good news: the money you receive is usually tax-free. This benefit, provided by the Health Insurance Portability and Accountability Act of 1996 (HIPAA), ensures that people facing serious health issues can use their funds for important needs without worrying about taxes.
Life settlements, however, come with different tax rules. When you sell a life insurance policy, the money you receive can be taxed in three different ways: as ordinary income, as long-term capital gains or as tax-free income. Here’s a simplified explanation of how the Tax Cuts and Jobs Act of 2017 affects the taxation of life insurance policy sales:
- The portion of the sale amount you receive that is equal to what you’ve paid in premiums (your “cost basis”) will not be taxed.
- The portion that exceeds your cost basis, but is less than the cash value of the policy, is subject to income tax.
- Lastly, any amount above the cash value is subject to capital tax gains.
But what about your estate? Here’s where it gets interesting. If you own your life insurance policy when you die, it’s included in your taxable estate. Therefore, if you’re someone with a larger estate, meaning your total assets are significant enough to potentially be subject to estate taxes, selling your life insurance policy could actually help lower the taxes your heirs might have to pay. Here’s how it works: when you sell your policy, you transfer ownership rights. As long as the transfer is completed at least three years prior to your death, the policy isn’t included in your estate. Additionally, the cash you receive for the sale could be spent or gifted to reduce the overall value of your estate. A smaller estate means there’s less to tax when it’s passed down to your beneficiaries, possibly lowering the tax bill.
Here’s a quick recap to help summarize these tax considerations:
- Viatical settlements: If you’re terminally ill, the money is generally tax-free.
- Life settlements: Any amount above what you’ve paid in premiums is taxed as ordinary income, and amounts above the cash value of the policy are considered capital gains.
- Estate tax impact: Selling your policy and converting it to cash might reduce the value of your taxable estate, which could lead to lower estate taxes for your heirs.
Given the complexities, it’s always a good idea to talk to a tax professional who can help you navigate these considerations and determine the best course of action for your specific situation.
Should I sell my life insurance policy?
Deciding whether to sell your life insurance policy is a big decision, and it’s important to weigh the pros and cons before taking the leap. While it might make sense in certain situations, selling your policy isn’t the right choice for everyone. Here’s a closer look at the benefits and potential downsides to help you determine if selling your policy aligns with your needs.
Pros of selling your life insurance policy
- Immediate cash flow: Selling your policy can provide you with a lump-sum payment that can be used for any immediate financial needs, whether it’s covering medical bills, paying off debt or funding retirement.
- Relief from premium payments: If keeping up with monthly premium payments has become a burden, selling your policy can free you from that ongoing financial obligation.
- More value than surrendering: While you always have the option to cancel or surrender your policy, a settlement usually offers a higher payout, making it a better alternative if you’re looking for maximum value.
Cons of selling your life insurance policy
- Loss of death benefit: Once you sell your policy, your beneficiaries will no longer receive a death benefit. If leaving a financial legacy or covering end-of-life expenses for loved ones is important to you, selling might not be the best choice.
- Possible tax implications: As mentioned earlier, proceeds from a life settlement could be taxed as ordinary income, reducing the overall value you receive.
- Medicaid eligibility impact: Selling your policy could affect your eligibility for Medicaid, which is a needs-based program. The lump-sum payout might push you over the income or asset limits, leading to potential disqualification from benefits.
- Health check-ins: In some cases, the buyer of your policy has the right to inquire about your health and life expectancy annually or even monthly, depending on the state’s laws.
- Potential for multiple sales: The settlement provider that buys your policy may resell it, meaning your medical information may be disclosed to multiple third parties.
Selling your life insurance policy can be a smart financial move if the payout or relief from premium payments brings you immediate benefits that outweigh the need to keep your coverage. However, remember to carefully consider the long-term impact, especially if your loved ones rely on the death benefit your policy provides.
Alternatives to selling your life insurance policy
If you’re in need of funds or struggling to keep up with premium payments, selling your life insurance policy might seem like the only option. However, there are several alternatives that can provide quick access to cash while allowing you to keep your coverage or at least explore other solutions before selling. Here are some options to consider:
- Accelerate the death benefit: If you’re dealing with a terminal or chronic illness, your policy might include an accelerated death benefit rider. This allows you to access part of your death benefit while you’re still alive. It’s often used to cover medical expenses and other urgent needs without having to sell your policy entirely.
- Take out a loan against your policy: With permanent life insurance, you can borrow against the cash value that has accumulated in your policy. You’ll need to pay interest, but the loan doesn’t have a set repayment structure as long as you keep the policy active. Be aware that any unpaid loan balance and interest will reduce the death benefit. Additionally, borrowing a large percentage of the cash value could cause your policy to terminate without value and create a phantom income tax gain.
- Withdraw funds from the cash value: Permanent policies build cash value over time, and you can typically withdraw funds directly from it. Withdrawals don’t need to be repaid, but they will reduce the death benefit dollar-for-dollar. This is a quick way to access cash while still keeping your policy in force.
- Replace your policy: If your current policy no longer fits your needs or is too costly, you may be able to find a cheaper policy. However, it’s important to remember to not cancel your existing policy until the new one is fully in place to avoid any coverage gaps.
- Surrender your policy: Permanent life insurance policies with cash value can be surrendered, allowing you to receive the surrender value — the cash value minus any fees or outstanding balances. While surrendering your policy ends your coverage, it’s a straightforward way to access funds if selling isn’t your preferred option.
- Opt for a Medicaid life settlement: If you need long-term care or are already on Medicaid, a Medicaid life settlement might be an option. This involves selling your policy to a life settlement provider, with the proceeds used to pay for care while allowing you to retain Medicaid eligibility in some states.
- Reduce the death benefit: This will lower the premium. If you would prefer not to pay further premiums, you may be able to reduce the death to a level where no further premiums are required. You’ll need to discuss these options with your life insurance company.
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