Unlike other insurance policies, life insurance has little use while the policyholder is alive. For many people, this can seem like an unnecessary expense, especially when they realize that the policy is no longer as valuable as it once promised to be. There may come a time when you no longer need the policy, or when you need the money more. You may wonder if it makes sense to keep paying your premiums each month instead of using those funds for other things in your budget; or maybe you need to fund something bigger and want to cash in your policy for its full value. If you need money, selling your life insurance policy can be profitable. Just make sure you know how the process works, what’s at stake, and how to make choices you won’t regret later.
How Does Selling a Life Insurance Policy Work?
Just as when you initially purchased your life insurance policy, when you sell it you are entering into a legal contract. You agree to sell the entire policy to a third party, and the death benefit associated with it, in exchange for money you both agree to. To be more specific, when you sell your policy, you give up all rights and future payouts associated with it. Once the deal is finalized, the buyer takes over all premium payments and becomes the beneficiary of the death benefits and all former names are erased.
There are a few other terms for this process, so when you sell your policy, you may hear it called a “life settlement” or a “viatical settlement.” The latter happens when the seller has a terminal illness or a life expectancy of less than two years.
How to Sell a Life Insurance Policy
As you might imagine, selling life insurance to third parties is part of a highly regulated industry, and therefore it can be a very complex process. While you can try to find a buyer yourself, the safest and most efficient way is to work with professionals in this field. These may include:
- A professional advisor
- A life insurance broker who can give you advice and look for buyers on your behalf
- A life insurance provider
Make sure the people you are dealing with are licensed. You can call your state insurance department to check their background. This simple step can help prevent fraud or other problems.
Once you have a buyer, have the following information on hand:
- The type of life insurance you have; if you have term life insurance, you may also want to find out if you can convert it to a universal life or whole life policy
- Personal information, such as your health and medical history, and any other facts that may affect the value of your policy
- The cash surrender value of the policy
- How many years premiums will have to be paid for
How Much Can You Get In a Life Insurance Settlement?
As a policyholder, you can expect to receive about 20% to 25% of the amount that would be paid out when you die, although this figure can vary. The exact amount you will receive in cash back when you settle depends on a wide range of factors, including:
- The value of the policy’s death benefit
- Your age
- The cost and time you have left to pay premiums
Many companies have restrictions in place before they even consider a deal. For example, some limit the process to people over the age of 65. You will be asked to submit an application through a formal process before they will approve you without question. Then they will use the above factors (and maybe more) to arrive at a price that still allows them to make a profit. The amount of money the seller will get must be more than the surrender value of the policy and will be less than the value of the policy’s death benefit.
Economic hardship may prompt you to consider liquidating your assets for cash. Sometimes you have no other choice, but when it comes to life insurance, think about why you bought the policy in the first place. Do you still need the coverage? Are the beneficiaries of the policy dependent on the death benefit if something happens to you? Think carefully about the answers to these questions and talk to your insurance agent or financial advisor before to sell your life insurance policy.