Life insurance is designed to provide your estate with the funds necessary to pay debts and leave your loved ones with some financial security. However, there are instances in which you may need money, or your circumstances change, and life insurance is no longer necessary. Selling your life insurance policy is a viable option, but it is critical to understand the process before making this financial decision.
Life and Viatical Settlements
Selling your insurance policy to a third party for a specified amount of money is known as a life settlement. You receive cash, and the buyer now owns your policy and continues paying the premiums. When you die, the new owner receives all of the death benefits.
If the policyholder has been diagnosed with a terminal illness and is not expected to survive for more than two years, the life insurance sale is known as a viatical settlement. These settlements can pay for medical expenses and other debts, so family finances are not overwhelmed.
Life Settlement Eligibility
Not everyone can sell their life insurance policy, as certain conditions must apply. Only those aged 65 and over qualify for a life settlement. Such policies must have death benefits of at least $100,000, and the policy must have been active for a minimum of two years.1
Viatical settlements do not have a minimum age requirement, but the policyholder must generally have two years or less in life expectancy.
Why You May Wish to Sell Your Life Insurance Policy
Every policyholder has their own reasons for selling their life insurance, but common motivations include:
- No longer having anyone reliant on the policyholder’s support
- No heirs
- Funding retirement needs
- Inability to continue paying the premiums
- Needing to pay for nursing home or other long-term care
- Finding themselves over-insured
- No need for the safety net provided by the policy
For many older adults, paying monthly premiums becomes increasingly burdensome. After years of paying premiums, they risk losing their insurance due to an increasing lack of affordability. For some seniors, receiving a lump sum payment is a wiser option than simply losing insurance coverage due to premium costs.
Finding a Buyer
Life insurance sales usually involve working with a broker. The settlement broker will find investors willing to purchase your policy. There is an opportunity to shop for the best deal. You can also work with a provider who will buy the policy from you directly.
Age is typically an important factor when selling a life insurance policy. Potential investors tend to favor policies held by older adults. Why? Because they’re looking to pay as little as possible in future premiums before receiving the death benefit.
If you’re looking to sell your policy, expect to provide all medical records. Using a mathematical formula, medical underwriting by the providers estimates how long the policyholder is expected to live.
How Much Is a Life Insurance Policy Worth?
You will likely not receive your policy’s face value. On average, recipients of a life settlement get approximately four times the policy’s cash surrender value. The death benefit value typically varies between 10 and 25 percent. That means a $100,000 policy will provide you with up to $25,000.2
Factors affecting how much you will get for selling your life insurance policy include life expectancy, its cash value and the premium amount. Individuals with a shorter life expectancy will likely receive a larger settlement amount.
When a policyholder sells their policy, the cash payment is almost always greater than the policy’s surrender value, but less than the death benefit.
If you have a large policy, it is possible to sell only the amount you need. For example, if you own a $2 million policy, you can sell half of it, retaining the rest for beneficiaries.
Not everyone selling their life insurance policy receives a lump sum. Some people may prefer a settlement in which income is paid over a predetermined amount of time.
Life Settlement Considerations
Before selling your life insurance policy, it is crucial to consider all financial and practical aspects. Prior to making your decision, consult a financial advisor or your accountant. You’ll want to be sure that the sale of the policy does not trigger detrimental tax obligations or result in losing access to public benefits such as Medicaid.
Life settlements include all sorts of fees, and it is vital that you understand all of the costs involved. There are alternatives to selling your life insurance policy that may prove just as beneficial, such as borrowing from it.
We are here to help you live life to the fullest by helping you plan for your future today. Please feel free to reach out to us today with your immediate questions or concerns. You can give us a call at 330-836-7000 to schedule an introductory conversation and we will begin helping you build a solid foundation for the future. You can also schedule an introductory conversation with us here.
Since 2004, TCM Wealth Advisors has been providing Fee-Only Fiduciary Advice to our clients in Northeast Ohio and all across the country.