Every year, thousands of Americans are unlocking hidden stores of personal wealth by selling their term life insurance policies.
Selling one’s insurance policy— a process also known as a “life insurance settlement”, or “life settlement”— enables a policyholder to receive large, lump-sum cash payment, in exchange for naming a third party buyer as the beneficiary of their death benefit. In exchange, the buyer pays the remainder of the policy’s premiums.
The amount received in a life settlement is generally larger than the policy’s cash surrender value (how much you would get for surrendering your policy to your insurer), and can be anywhere from $10,000 to over $200,000. This can be a huge financial boost for those with large end-of-life expenses, such as long-term care.
To help you understand what type of policy you have, as well as how to evaluate and maximize your life settlement, we put together a guide for how to properly sell your term life insurance.
- Why should I sell my term life insurance policy?
- Am I eligible to sell my term life insurance policy?
- What type of life insurance policy can I sell?
- How much is my life insurance policy worth?
- How do I sell my term life policy?
- Do I need a life settlement broker?
- Does it cost anything to sell my term life policy?
- Questions to ask before selling your term life policy
- Get a free policy valuation
Why should I sell my term life insurance policy?
There are several reasons you might want to sell your term life insurance policy.
- You need access to a cash lump sum. The primary reason is money. If you are facing debt—such as large medical bills—selling your life insurance policy allows you to access substantial sums of money, sometimes over $100,000. However you should remember that in exchange for a cash payout today, you are sacrificing over half the full amount of your policy’s death benefit.
- Your beneficiaries no longer need your death benefit. Another reason many choose to sell their life insurance policy is that it no longer makes sense for their original beneficiaries. Oftentimes individuals name their spouses as their primary beneficiary, and if the spouse of a policy owner has passed away before them, there may no longer be any reason to hold onto that policy. This is also true of those who named children as their beneficiaries, and those children have now grown old and are financially stable.
- You want to eliminate costly premiums. The final reason is you simply cannot afford to pay your monthly insurance premiums anymore. This is known as a policy lapse. If a policy lapses, especially with a term life insurance policy, you are no longer entitled to the policy’s death benefit. This means you lost all the value from premium payments over the years. Selling a lapsing policy when possible always makes sense, as you would receive no other value for your policy in that circumstance.
Am I eligible to sell my term life insurance policy?
In order to sell your life insurance policy, you will typically need to meet a few industry-wide eligibility standards:
- Be over age 65
- Have an active policy with a death benefit of at least $100,000
- Have had the policy active for at least two years
Exceptions to age requirements exist if the policy owner has a diminished life expectancy as result of a terminal illness. Those under the age of 70 with no serious health conditions are unlikely to get an offer higher than their policy’s cash surrender value.
What type of life insurance policy can I sell?
The first question to ask yourself is what kind of life insurance policy you have: term or whole?
While term life insurance was historically the most common, recent figures show that whole life insurance has become more popular with Americans, with 6.4 million policies bought in 2016, compared to 4.3 million for term life policies. However the most common type of life insurance policy to sell in a life settlement transaction is term life insurance.
Here are the main distinctions between the two types of policies:
Term life insurance: The basics
With term life insurance, regular monthly payments are made for the duration of the term — usually 30 years — and if the insured individual passes away during this term, the beneficiaries receive the face value of the policy, tax free.
However, if the term expires while the policyholder is still living, no money is paid out. A term life policy has no savings vehicle or cash component, meaning you don’t accrue value over time. For this reason term life insurance tends to have lower premium payments than whole life insurance.
Note: There are occasionally decreasing term life insurance policies, where the payout and monthly premiums decrease over time, however this accounts for only 3% of term policies. You can read a full list of the types of term policies here.
Whole Life Insurance: The basics
A whole life insurance policy, also referred to as a permanent life insurance policy, is the other primary type of life insurance. The primary difference with whole life insurance policies is that they include a cash value component, which builds over time, both through contributions from your monthly payments, and capital gains made through investments.
There’s also a type of permanent policy known as a universal life insurance, (or adjustable life insurance), which is similar to traditional whole life insurance, but with much more flexibility. For instance you can increase your death benefit, or decrease your monthly premium over time.
While you are technically able to sell both types of policies, life settlements are typically made for term life policies, as those with whole life insurance are able to access the cash value of their policies rather than sell them.
How much is my life insurance policy worth?
According to the Life Insurance Settlement Association (LISA), four main factors determine the amount of money you stand to gain from a life settlement:
- The death benefit amount
- Life expectancy of the insured
- The remaining premium premiums to be made
- The discount rate or investor required rate of return
Generally, the amount you receive from a life settlement policy will be 10-25% of the face value of the policy. The size of a policy tends to be 6 to 10 times that of your annual salary.
With life settlements, those who have a terminal illness, or diminished life expectancy can sometimes receive payouts even larger than 25%. This is particularly true of those receiving viatical settlements.
To quickly get an idea of how much your policy is worth, you can get an estimate using a life settlement calculator.
How do I sell my term life policy?
Selling your life insurance policy today is a relatively simple process. It doesn’t matter whether you have a new policy or one that has been in force for decades. As long as you are 65 and older or terminally ill, and the face value of your policy is over $100,000, then you should be able to make your life insurance work for you. The steps involved in the life settlement process are as follows:
1. Find a life settlement company in your area
The first step to selling your life insurance is finding a life settlement company in your area to let them know you have a policy to sell. It can be a whole life policy, universal life or variable universal life policy or even a convertible term life insurance policy. This type of term life policy is acceptable because it is convertible into a smaller amount of paid-up cash value life insurance.
2. Provide documentation to the life settlement company
The life settlement company will ask you for the required documentation necessary for them to analyze your situation and determine the current market value of your policy. The documents they will need include a copy of your life insurance policy along with all of your medical records (or at least your recent ones).
3. Evaluate your offer
Potential buyers will set a price for your policy and will then approach you with an offer. You are free to accept or reject it without cost or obligation. The offer will typically be about two to three times the size of the cash value in your policy but still much smaller than the death benefit.
4. Accept the offer or explore your options
If you are satisfied with the payout that the life settlement company has offered, then you will sign ownership of your policy over to the life settlement company. If not, you’re free to explore your options with other life settlement companies.
Once you do accept, you will remain on the policy as the insured even though you’re no longer the policy owner. You will then collect a lump sum payout which you can use as you please. You can fund IRAs with this money or pay bills, like medical expenses, that have accumulated.
5. The life settlement company becomes the beneficiary
The life settlement company will then name itself as the new primary beneficiary on the policy and will also assume the responsibility of paying the annual life insurance premiums until your death. At this point, your life insurance coverage will cease.
Do I need a life settlement broker?
A life settlement broker is a state-licensed professional that negotiates life settlements on behalf of policyowners, acting as a middle man between them and life settlement providers. They assist in organizing your necessary medical records and ensuring you get the maximum payout possible. While life settlement brokers are very valuable, they also charge a percentage of your death benefit (as mentioned above), which can be a substantial amount for large policies.
If you decide to go with a life settlement broker, we recommend always researching them first. Verify your broker using the search portal at FINRA (Financial Industry Regulatory Authority) or checking with your local state insurance department.
Does it cost anything to sell my term life policy?
There are a few costs associated with selling your life policy, primarily submitting the proper medical records. This can cost up to $1,000.
The other main cost is if you use an insurance agent or broker, who will often charge a percentage of the death benefit for their service, typically around 6%. Keep in mind this in terms of the total death benefit, meaning they may be actually charging over 30% of the payout you receive.
Questions to ask before selling your term life policy
Selling a term life policy cannot be undone, so before you make the decision, you’ll want to ask yourself a few questions:
- Have I discussed this with my loved ones? Beneficiaries of the life insurance policies tend to be your closest family members, and the decision to end your life insurance policy directly impacts them. Make sure to discuss your decision to sell with the involved parties. For instance, they may prefer to take over your monthly payments, or offer financial assistance for your care.
- Do I understand my tax implications? Unlike a life insurance payout, which is tax-free, a life settlement may be subject to taxation. You’ll want to discuss your implications with a financial advisor before making any decisions.
- Have I considered my other options? Before you decide to sell your policy, you may want to discuss other options with your insurance company. For instance, many may choose an accelerated death benefit, or to borrow against the value of their policy.
- Am I eligible for Medicaid? If you complete a large life settlement transaction, you may lose your Medicaid eligibility as you cannot have more than $2,000 in assets. If you rely on Medicaid benefits, be sure to check with a Medicaid advisor or financial advisor before selling your life insurance policy.
Get a free policy valuation
A life settlement is a practical option for many who need access to a cash lump sum near the end of their lives. However, precautions should be taken, and you should take time to discuss your options with a financial planner and your loved ones.
Want to find out how much you could earn from a life settlement? Get an instant policy valuation below.