Few people realize their life insurance policy is one of their largest assets that can be sold through a process known as a life settlement. If you can no longer afford your policy or have no need for it anymore, a life settlement will yield far more money than surrendering it to the insurance company.
To help you decide if you should sell your life insurance policy, we’ve created this comprehensive guide with everything you need to know about the process and other frequently asked questions. If you’re curious about your eligibility for a life settlement or the cash value of your policy, contact us for more information and a FREE estimate.
Can I Sell My Life Insurance Policy?
In short, yes — you can sell your life insurance policy for cash through a process known as a life settlement so long as you meet the proper eligibility requirements (detailed in a section later on). This is a right that has been legally granted to you by the Supreme Court since 1911, following the landmark case Grigsby v Russell. You have the right to sell your life insurance if you wish, but before making this decision you should have a full understanding of the life settlement process including the pros and cons of this option.
Can I Sell My Term Life Insurance Policy?
In many cases a term life insurance policy can be converted to a permanent policy, making it eligible for a life settlement. If you were recently diagnosed with a chronic or terminal illness and have a term policy, you may be eligible for a viatical settlement without needing to convert it. To verify whether you can sell your term life insurance, contact us and we can examine your policy and let you know.
The process by which you can sell your life insurance policy is known as a life settlement (or viatical settlement under specific circumstances). This process consists of exchanging your policy to a third-party investor for a lump cash sum that can be used however you’d like including paying down debt, going on vacation, or retirement living expenses. Once sold, the buyer becomes responsible for paying your insurance premiums through the remainder of your life, and when you pass away they receive the death benefit from your policy.
The life settlement process is complex and overwhelming for most people, which is why it’s recommended to work with an experienced third-party such as Harbor Life Settlements to guide and ensure you get a fair value for your policy. Before you begin the process, you’ll need to decide whether you’ll work with a broker or provider
1. Work with a broker
A broker is a third party company or individual who represents you in the life settlement process. When you work with a broker, they’ll present your policy to their network of buyers and get as many offers as possible which drives up the price resulting in a higher value for your case.
Harbor Life Settlements partners with its sister-company Harbor Life Brokerage, who has the world’s most advanced online settlement auction platform used to connect more buyers and sellers than has ever been possible before. While the traditional life settlement process is slow and time-consuming which limits the number of people your policy can be presented to, this revolutionary online exchange streamlines the process so your policy can be put in front of more buyers resulting in a higher number of offers and value for your policy.
2. Work with a provider
A provider is the company or investor who actually makes an offer and purchases the policy. The goal of a provider is to buy your policy for as little as possible to maximize their profit. You can work directly with them, but the downside is you’ll only get a single offer for your policy which limits its potential value.
Requirements for Selling Your Life Insurance Policy
Once you decide who you’ll work with, you’ll need to provide some basic information about your age, health, and insurance policy to see if you meet the eligibility requirements for a life settlement. This is typically done through an online or over-the-phone screener, more detailed information will be requested later to verify eligibility. The qualifying factors for a life settlement include:
1. Type of Policy
Not all policies can be sold. To qualify for a life settlement, you must have a convertible term, variable, or universal life policy.
2. Value of the Policy
In most cases, the face value of your policy must be at least $50,000 to qualify for a life settlement.
3. Age of the Policy Owner
People who have reached the age 70 years or older are most likely to qualify for a life settlement. The older the person is, the more valuable the life settlement becomes.
4. Age of the Policy
To sell your life insurance, you must own the policy for a set number of years regulated by the states. Each state has their own waiting period which varies between 2-5 years before you can sell it.
If you meet the above qualifications, you likely qualify for a life settlement. However, even if you don’t meet the qualifications above — you may qualify for a viatical settlement if you were recently diagnosed with a chronic or terminal illness.
If you need help determining your eligibility, contact us today to find out if you qualify and how much your policy is worth. We will guide you step-by-step through the process answering all of your questions and can give your a free estimate of the value of your policy if you are interested.
After deciding who you’ll work with and doing a general review of your information to check eligibility for a life or viatical settlement, the process will typically go as follows:
1. Submit Medical and Insurance Records, or Provide Authorization
The general information you present to the partner you choose to work with serves as a screener, but to verify eligibility for a life or viatical settlement they’ll need to actually examine medical records and insurance policy documents. In some cases you may be able to submit this, but typically the partner will request authorization so they can get the information directly from your insurance company and healthcare provider.
Once eligibility is verified, the partner will begin the underwriting process which consists of thoroughly evaluating your information to calculate a life expectancy and an estimate of the policy’s value.
3. Find Interested Buyer(s)
At this stage, the partner you work with will find one or more investors or entities interested in buying the life insurance policy. If working with a provider, they will note whether or not they are interested in purchasing the policy.
4. Seek and Negotiate Offers
The interested buyer(s) will submit an offer for the policy. The policyholder can accept or reject the offer and ask for more money until a price is eventually agreed upon.
5. Exchange Ownership of the Policy For a Lump Cash Sum
The buyer gives the policyholder a lump cash sum and takes ownership of the policy.
6. Buyer Pays Premiums and Maintenance Fees
The buyer pays premiums and other maintenance fees throughout the remainder of the original policyholder’s life.
7. Buyer Collects Death Benefit When Original Policyholder Dies
When the original policyholder eventually passes away, the buyer collects the death benefit from the insurance company.
How Much Can You Get From a Life Settlement?
The amount of money you receive from a life settlement varies depending on several factors, but you may be able to get up to 60% of the death benefit value by selling it which is significantly greater than what you’d get from surrendering it. To learn how much your policy is worth — contact us for a free estimate, use our life settlement calculator, or consider the following factors used in policy valuation:
1. Life Expectancy
Life expectancy is an estimate of how long the policyholder is expected to live, which is calculated by examining the age and health of the individual. In a life settlement the buyer will need to continue paying insurance premiums for as long as the policyholder lives, so a shorter life expectancy makes the policy more valuable because they expect to pay less in premiums over time.
2. Premium Costs
As noted, the buyer of a life insurance policy will need to continue paying premiums until the policyholder passes away. Thus, the cost of premiums is an important factor in policy valuation. Low premiums mean the policy is cheaper to maintain which results in a higher life settlement value. On the other hand, high premiums are more expensive and risky for the buyer which results in a lower offer.
3. Death Benefit Value
The death benefit is ultimately what the buyer is investing in when they purchase a policy, so a larger death benefit means a larger payout for them. Thus, larger policies typically result in higher offers. However, even a small policy could be worth a sizable sum depending on the other factors above.
Why People Sell Their Life Insurance
A majority of life insurance policyholders purchase policies as a backup solution to provide financial support to their loved ones in case of any adversities in the future. However, over time circumstances change and they may decide they no longer want or need their policy anymore. Rather than stopping payments and getting nothing or surrendering it for a small sum, selling it results in the greatest value and there are several reasons people choose to go this route:
1. You No Longer Need Coverage
Once your loved ones are financially independent or you have enough in savings to support your family after your passing without the safety net of life insurance — you may see your policy as an unnecessary expense. Instead of paying money while you’re alive to provide unnecessary financial support after your passing, it makes sense to save that money for emergency expenses or improve your quality of living during your lifetime.
2. Unaffordable Premium Costs
As you grow older, your policy may become more expensive to maintain which becomes unsustainable during retirement when you have less money coming in. With a life settlement, you no longer have to pay these costly premiums and the money you receive from the transaction helps provide financial stability for you and your family.
3. Better Use of the Funds
Even if you can maintain your coverage, you may find there are better uses for the money you would otherwise spend on premium payments and the lump cash sum you get from a life settlement can help achieve financial goals during your lifetime rather than after your passing. For example, you could pay off debts such as a mortgage or even invest the money you get to create a nest egg that can be pulled from during your lifetime. You could also set aside some of the money you get so loved ones still receive an inheritance upon your passing.
4. Meet Healthcare Costs
The rapid increase in the cost of healthcare has put many seniors in need of financial assistance. Whether it’s hospital bills or long-term care expenses, many find they are unable to pay these costs out of pocket. When this occurs, a life settlement can provide the funds you need to pay for healthcare without taking on loans, leaning on family members, or parting with cherished assets such as your home.
5. Your Term Policy Is About To Expire
Term policies tend to be more affordable than permanent options, but only provide coverage for a set period of time. When this period is nearly up, the policyholder must decide whether they will continue coverage (often at a higher cost), get a new policy, or convert the policy into a permanent option which may then be eligible for a life settlement.
If you no longer want coverage, converting your term policy into an eligible form of permanent insurance enables you to recoup some of the money you’ve put in over time.
Pros and Cons of Selling Your Life Insurance Policy
In order to determine if you should sell, it’s important to weigh the pros and cons of life settlements.
Pros of Life Settlements
Receive a large cash sum which can be used however you’d like
Recoup money you’ve put in as opposed to letting it lapse and getting nothing
Get more money than you’d receive by surrendering your policy to the insurance company
No more responsibility for paying insurance premiums
Cons of Life Settlements
Your beneficiaries won’t receive a death benefit
Depending on the details of your life settlement, you may have to pay taxes
Brokers and life settlement companies will charge fees and commissions for their work
Accepting a life settlement may make you ineligible for Medicaid or other types of financial assistance
If you still have questions about selling your policy, here are some of the most common things people ask us. If you have a question that isn’t addressed here, contact our team for additional assistance.
Are There Rules on How You Can Spend the Money From a Life Settlement?
You can spend the money you receive from a life settlement any way you’d like. Many people use the money they receive to pay off debt, fund retirement living expenses including vacations, or set up an emergency fund for future medical expenses. The proceeds you get from a life settlement can help provide financial stability in your golden years, so we recommend at least getting an estimate so you have an idea of how much your policy is worth – even if you don’t plan on selling for several years.
How Long Does The Life Settlement Process Take?
The process varies from case-to-case and can take anywhere from two to four months depending on how long it takes to acquire the proper policyholder documents, the level of interest among buyers, and length of negotiations between the buyer and seller.
Can I Back Out If I Change My Mind?
You have the option to back out at any point during the life settlement process and have no responsibility to accept an offer unless you find it suitable. Furthermore, there is also a recission period that is typically two weeks in which you can back out of the deal after accepting an offer.
How Are Life Settlements Taxed?
The profit you receive from a life settlement is taxable, meaning you’d have to pay taxes if you received more from a life settlement than you’ve paid in premiums over the policy’s life. The difference between the surrender value and premiums paid is taxed as regular income, and the remaining proceeds are taxed as long-term capital gains. The taxation rules for life settlements can be complex so it’s best to consult a financial advisor to see if or how much you’d have to pay.
Alternatives to Selling Your Life Insurance
If you don’t qualify for a life settlement or want to know about your other options, there are a few alternatives you should know about:
Borrow Against Your Policy
If you want to maintain your policy but need money for other expenses, you may be able to borrow money from the cash value of your policy. The amount you can borrow depends on your insurer, and you’ll be charged interest for the loan. If you haven’t repaid this loan when you pass away, the remaining balance will be subtracted from your death benefit.
Utilize an Accelerated Death Benefit
An accelerated death benefit (ADB) is a rider included in most insurance policies that lets the policyholder receive a portion of their death benefit in advance if needed. Eligibility for an ADB depends on your insurer, but typically this option is used for individuals diagnosed with a terminal illness.
Surrender Your Policy
If you no longer want or need coverage, you can surrender your policy to your insurer for a cash sum. However, this option isn’t recommended because a life settlement produces a far higher value than surrendering it.
Let Your Policy Lapse
Letting your policy lapse is technically an option, but isn’t recommended because you receive absolutely nothing for your policy. Instead of letting it lapse, you’re much better off surrendering your policy for a small cash sum or even better would be selling it through a life settlement. Even if you have a term policy, you may be able to convert it into a permanent type which would be eligible for a life settlement.
Should You Sell Your Life Insurance Policy?
In the end, only you can decide whether a life settlement is the best option for your needs and financial goals. We’ve detailed everything you need to know about the process so the only thing left to do is find out how much your policy is worth. Even if you don’t plan on selling, we recommend getting a valuation so you can have this as an option for the future.
Harbor Life Settlements is ready to help you discover the cash value of your life insurance policy. We’ll guide you through the life settlement process and answer any questions or concerns you may have. We will verify your eligibility, provide you with a free cash estimate, and should you choose to sell — we will handle all of the work to make things as easy as possible for you while also helping you get the highest amount for your policy.
Contact us to get in touch with our team and find out how much your life insurance policy is worth in cash!