Life insurance provides your loved ones with financial protection by paying out a designated death benefit to beneficiaries when you pass away. Cash value life insurance is also a method of investing and your policy can increase in value over time.
While life insurance is an important part of a financial plan, there may come a time when it makes sense to sell your life insurance policy to obtain cash immediately. If you are considering selling your life insurance policy, it is important that you understand what is involved in the process and that you make an informed choice about whether the sale is right for you.
How to Sell a Life Insurance Policy
When you want to get money out of your life insurance policy, you have a few options.
If you have a cash value life insurance policy, you don’t necessarily have to sell it in order to be able to tap into the money the policy is worth. You can take limited withdrawals from a cash value life insurance policy and you may even be able to take a loan based on the value of the policy. The amount you are able to borrow is based on the value of the cash-accumulation account and the terms of your cash value life insurance. Surrendering, or cancelling, is also a way to get cash out but you’ll have to give up your insurance coverage.
Aside from these options, however, it is possible to actually sell the policy itself. There are companies called life settlement companies that buy insurance policies from individuals. The life settlement company gives you cash and, in exchange, the life settlement company keeps your policy. The life settlement company will pay the premiums going forward and, upon your death, will receive the death benefit.
Selling to a life settlement company is possible even if you have term insurance (rather than a cash value or whole life policy). However, you typically must meet certain criteria including being at least 65-years-old, having a life expectancy between 10 and 15 years (or less) and having a death benefit that exceeds $100,000.
A life settlement sale of an insurance policy can generate more cash for you than surrendering the policy, but there are downsides. For example, the money you sell the policy for is usually taxed as ordinary income. You also lose control of the death benefit and your beneficiaries are no longer protected.
Should You Sell a Life Insurance Policy?
Before you decide to sell a life insurance policy, there are a few key things to consider including:
- Whether you still need insurance coverage.
- The fact that the new policy owners are going to have access to your past and future medical records.
- The difficulty of determining whether you will get a fair price for the policy since the life-settlement industry is subject only to very marginal regulations.
- The commissions and fees associated with the sale of a policy (which can be around 30 percent).
If you consider these factors and decide that selling still makes sense, it is important to find a reliable life settlement company that will give you the money your policy is worth.