How to Sell Your Life Insurance Policy
Ever heard of a Life Insurance Settlement?
No? Don’t worry, neither have the majority of Americans!
So what is a life insurance settlement?:
“A life settlement refers to the sale of an existing insurance policy to a third party for a one-time cash payment. Payment is more than the surrender value, but less than the actual death benefit. After the sale, the purchaser becomes the policy’s beneficiary and assumes payment of its premiums. By doing so, he or she receives the death benefit when the insured dies.” -Source investopedia
To sum it up, a life settlement is selling your life insurance policy to an investor who collects the premium upon your passing, but also takes on payment of the premiums.
So maybe you’re thinking, why the heck would I do that?!
There are actually a lot of cases where selling your life insurance policy makes a lot of sense for most Americans (The first being that less than 10% of Insurance policies pay anything out at all in the end!):
- The inability to afford premiums. Instead of letting the policy lapse and be canceled, an insured person can sell the policy using a life settlement. Failure to pay the premiums may net the insured a smaller cash surrender value—or none at all, depending on the terms. A life settlement on a current policy, though, usually results in a higher cash payment from the investor.
- The policy is no longer needed. There may come a time when the reasons for having the policy don’t exist anymore. The insured party may no longer need the policy for his or her dependents.
- Cases of emergencies. In cases where an unexpected event arises, such as the death or illness of a family member, the owner may need to sell the policy for cash to cover these expenses.
- Cases involving key individual insurance policies held by companies on executives. This is typical for people who no longer work for the company. By taking a life settlement, the company can cash out on a policy that was previously illiquid.
- To Supplement Retirement. If your family is financially secure already, and you would prefer to use the money from the payout of the policy to live your life as you see fit during retirement or through a difficult medical diagnosis, then life settlement might be for you.
We can expand on there later, but now that we’ve provided some reasons that you may consider selling your policy, what’s next?
We’ve outlined some more things to consider before you try and sell your policy below.
The Top 5 Things To Consider Before Selling Your Life Insurance Policy:
1. Are your children and family on board?
Considering your mortality is a difficult subject for you and your closest loved ones. It’s important to make sure your family is set up to succeed financially if you choose to get a pay out on your life insurance now rather than once you pass. Your beneficiaries on your policy will have to sign off to complete the sale of the policy, so it’s crucial to have those conversations with them, to ensure the decision is best for both you, your spouse, and your children.
In many successful cases a common factor was that the children of the insured were well set up financially already and therefore approved the sale of the policy for a parent or family member who received more value from the sale of the policy and therefore the elimination of high premium payments that can be extremely high during old age years.
2. What will you use the money for?
Here are 5 good financial reasons to sell your life insurance policy:
Bills: If you need the money for something immediate such as medical bills or difficult financial times. This is one of the most common reasons for selling a policy that we see. Many times people with terminal illnesses want a chance at recovery and proper medical treatment, but cannot afford it. By selling their policy they can extract the maximum value from their existing policy and use the money for treatments.
In other cases debt and large expenses may be a reason to sell a policy now rather than later. The basic idea is that you are converting a future asset into an available resource. This is similar to selling part of a stock or investment portfolio. Although you forgo the future gains of the portfolio, you are still able to use the funds now for emergencies or larger expenses.
Expensive Premiums: If you can’t afford the premiums on the policy and are thinking about letting it lapse, you should absolutely look into a life settlement! Many people see the rate increase on their next renewal of term insurance and decide that it’s not worth paying the premiums to keep the policy. Either that or they outright can’t afford it. For example the premium on a 500,000 policy can be more than $25,000 per year! That’s a lot of money.
In some other cases the insurance company may give you a surrender value for giving up the policy. This is usually a very small amount that is pennies on the dollar compared to what an investor will pay you for the policy.
If you’re in perfect health and have a long life expectancy, then you may not be offered much for the policy, but it’s certainly better than $0 for letting lapse, or a low ball offer from the insurance company.
Retirement Supplement: If your family is financially secure already, and you would prefer to use the money from the payout of the policy to live your life as you see fit during retirement or through a difficult medical diagnosis, then life settlement might be for you. Money from the settlement can be invested in retirement accounts, used for travel, or for retirement living or care home payments. As discussed above, if your family is on board and they are already well set up in life, it may be the right decision for you to take a payout on your policy that will allow you to live your retirement in comfort rather than in stress.
No Longer Need The Policy: Another reason to sell your life insurance is that you no longer have a spouse or children that would be dependent on the claim in the case of your death. If you don’t have anyone who needs the policy’s benefit, it makes sense to pursue a life settlement and access the cash while you’re still alive.
Your Term Is Expiring: Term policies typically expire with no cash value and have expensive replacement costs. You may be able to convert your term policy into permanent life insurance and then sell the new plan for cash. Many people have misconceptions that term insurance can’t be used in a life settlement because of its expiry, but its actually the opposite. The convertibility of the policy actually makes it easy for investors to purchase in the right situations.
3. What is your health status?
One of the main things that will qualify you for a life settlement payout is your health status and overall life expectancy. If you are young and healthy there is almost no chance someone will buy your policy because it won’t make financial sense for them to wait 20+ years to collect the death benefit on your policy. However if you are over the age of 65 and have minor to significant health issues, then a life settlement is more likely. If you have a terminal diagnosis and have been given a timeline by a doctor, a life settlement is very likely, and you could be paid a high percentage of the premiums death benefit to use as you wish.
4. Work with a Life Settlement Broker not a Life Settlement Buyer:
Life insurance is complicated so don’t always take the first quote you get at face value. Many firms will give you a quote higher than they will actually pay to lock you into using them. Just ensure that you get the quote in writing after they have looked at your life insurance policy before you commit to a single firm.
5. Ensure your firm is LISA certified (Life Insurance Settlement Association):
LISA or the Life Insurance Settlement Association is a regulatory firm that ensures life settlement companies follow proper ethics within the industry. It’s important that your firm is certified with LISA. Other bonus certifications include ethics.net certified and Society of financial professionals members.
Types of Life Insurance Policies Policies
Now that you’ve considered what to look for when selling a policy, it’s time to look at your own specific insurance product and if it’s sellable. Almost any insurance product can be sold in a life settlement, but the main insurance products that work well are Term Insurance, Whole Life, Universal Life, & Joint Survivorship. Almost any policy can be sold in the right situation depending on your health and age, so it’s best to speak to an expert before you make any decisions.
Misconceptions
From our experience working with people at Richard Recommends, there is a largely held belief that Term Insurance is not well suited for a life settlement. This is actually the opposite of the truth! Term insurance can be especially expensive upon renewal as clients are aging and this leads to many people letting their policies lapse. Alternatively, you can convert the policy upon its term expiry and then flip it for a cash settlement.
Viatical Settlements vs Life Settlements:
The best way to think about a Viatical Settlement is the sale of an existing life insurance policy. This trade is also sometimes referred to as a Life Settlement. Generally, the distinction has to do with the health status of the insured and how that potentially may impact the tax treatment of the income from the sale.
If the insured is terminally ill, the sale is generally referred to as a viatical. On the other hand, insureds with longer life expectancies typically sell through a Life Settlement. However, some states have created legal definitions that differ slightly.
As long as you deploy a professional broker, don’t be concerned with the difference between a Viatical Settlement or a Life Settlement. Professionals can handle the legal aspects of the sale to ensure that you maximize the value of your policy and comply with all applicable state rules. This compliance ensures you will have all of the consumer protection created by each state’s department of insurance.
Brokers vs Providers:
One more important thing you should know is the difference between a life settlement broker, and a life settlement provider. You can think of a broker like a realtor. Brokers will list your policy and use their connections with life settlement buyers/providers to get you the best price possible for your policy. Brokers have it in their best interest to sell your policy for as much as possible, making it a win-win for both yourself and them. Life settlement providers are the investors who are providing the life settlement to you. They are purchasing your policy, taking over the premium payments, and collecting the death benefit upon your passing.
At Richard Recommends we work with life settlement brokers, and we recommend that our visitors work with them as well. A life settlement broker will market your policy and try to get you the highest price, whereas a life settlement provider will give you one offer and wants to pay the least amount possible. You can attempt to get multiple quotes from several providers, but leveraging the connections of a broker is likely the best way to get multiple offers and then accept the highest bid.
What To Do Next?
Now you know a little bit more about life settlements! If you’re considering selling your policy, or have thought about letting it lapse, it might be best to chat with a life settlement broker to see what your options are. A broker can advise you on if its best to:
- Sell your policy
- Surrender it to the insurance company for a cash payout
- Keep the policy
- Swap the policy for another insurance product
We’ve put together an assessment that can connect you with the right broker based on the specifics of your policy. If you would like to learn more you can try the free online assessment.
