How to Sell Your Whole Life Insurance Policy: A Guide

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There are several ways that you can draw money out of a whole life insurance policy. But some ways are better than others, depending upon your circumstances and how soon you need to get your hands on the cash.

The amount of cash that you can get is also dependent upon several different variables. But you may be surprised at just how much your whole life policy may be worth. It all depends upon the type of life insurance you own, who you’re trying to sell it to, and, to a lesser extent, the reason why you want to sell it. If you want to sell your policy because you have a terminal illness, then you’ll want to look at a viatical settlement.

What is my whole life insurance policy worth?

If you own a whole life insurance policy, or any type of policy that has cash value, you may believe that the value of the policy is only measured by the amount of cash value that it has stored up over the years (until, of course, the death benefit kicks in). But this is not always the case. Life insurance quotes in this case are determined by a number of different variables.

A list of the ways that you can access the cash value in your whole life policy (or universal life insurance policy, variable universal life policy, or convertible term insurance policy) includes the following methods:

Make a cash withdrawal

It is always possible for you to simply tell your life insurance company that you wish to withdraw some of the cash value in your policy for whatever reason. If you wish to keep your policy in force, be sure to leave enough cash value in your policy to avoid policy lapses. (Your insurer will only allow you to do this with a cash value policy and not a convertible term policy.)

Surrender your policy

If you don’t want or need the life insurance coverage from your policy anymore, consider simply surrendering the policy back to your life insurance carrier. You do this by stopping your premium payments and notifying your carrier that you do not wish to carry your coverage any longer.

You will receive the remainder of the cash payout in the policy after all penalties, administrative costs and taxes have been levied. Be sure to ask your carrier how much cash surrender value you’ll have left before you surrender the policy so that you’ll know how much you can expect to receive.

Borrow from your policy

This is perhaps the most common way that policyholders access the cash value in their permanent life insurance policies. As long as you don’t borrow too much, the policy stays in force and charges you interest on the amount that you borrowed.

You don’t have to pay it back at all if you aren’t able to. Just know that the amount of the policy death benefit will be reduced by the amount of any outstanding policy loans when the face value is paid out after your death.

Tap into accelerated death benefit riders

Your policy may allow you to access some of the death benefit in the policy under certain conditions if your policy has accelerated death benefit riders. For example, if you become physically unable to perform at least two out of the six activities of daily living, then your policy may pay you a portion of the death benefit while you are living so that you can pay for medical or long-term care expenses. There are long-term care, disability, chronic illness and critical illness riders that can provide you with a sum of cash up front when you need it.

It may also be possible to borrow against the death benefit in your policy if you can find a lender who is willing to accept a portion of the death benefit as repayment. However, this practice is not very common. Be sure to craft a well-designed contract with the lender that clearly outlines the terms of the loan and how it will be repaid so that there are no misunderstandings later on.

Get a life insurance settlement

Perhaps the best option of all is to sell your cash value policy to a life settlement company. These companies are in the business of buying life insurance policies from individuals who no longer want or need their coverage, or else they need cash now to pay bills more than they need the policy’s death benefit. This type of transaction is described in more detail below.

Happy grandparents playing with their grandchild after the sale of their whole life insurance policy. How do I sell my whole life policy?

Selling your life insurance policy today is a relatively simple process. The only real prerequisites are that your policy typically needs to have a face amount of at least $100,000, and you need to be 65 years or older.

It does not matter whether you have a new policy or one that has been in force for decades. If you meet those two criteria, then you should be able to make your life insurance work for you. The steps involved in this process are laid out as follows:

1.  Find a life settlement company in your area

The first step to selling your life insurance is finding a life settlement provider in your area to let them know you have a policy to sell. It can be a whole life, 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.

It is possible to sell only a portion of your policy’s death benefit amount to a buyer if you don’t want to surrender the entire thing and wish to leave something to your original heirs. Of course, this will also lessen the amount of money that you get upfront.

You may also want to enlist the help of a life settlement broker in order to find the right buyer with a solid reputation. The broker can act as the go-between between you and the life settlement company. But your eligibility for a settlement does not depend on this.

2. Provide documentation to the life settlement company

The life settlement company will ask you for the required documentation necessary for their underwriting department 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

The life settlement company 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. As with the old viatical settlements, the amount of 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. This is true even if you live in New York.

4. What happens after I sell my life insurance policy?

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 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.

What's your life insurance policy worth?

Can I sell any form of permanent life insurance?

Any form of permanent or cash value life insurance, along with convertible term policies, are eligible to be sold if the death benefit is large enough. And the amount of cash value that you have in the policy doesn’t really matter, as the buyer will be chiefly concerned with the death benefit and your health condition.

If you are in poor health, then this can be an incentive for the buyer to make you a higher offer because statistically, you are more likely to die before you reach your life expectancy. This can make it easier for you to cash out your policy with a settlement company.

Is my life insurance settlement taxable?

There are also tax consequences that come with selling your life insurance policy, and you should consult your tax advisor for more information on how you specifically may be affected.

Generally, the sale proceeds equal to the total amount of premiums that you paid into the policy are treated as a tax-free return of principal. Any amount of the policy’s cash value that exceeds the premiums you paid is usually taxed as ordinary income.

Finally, any amount of sale proceeds that exceed the cash value is taxed as a long-term capital gain. This will be true whether you elect to receive an annuity or a lump-sum payout.

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In a nutshell, selling your whole life insurance policy can get you cash up front in a fairly short period of time. You can use this money to pay for medical or long-term care expenses or for any other purpose that you choose.

Consult your financial advisor, financial planner or life insurance agent for more information on how you can sell your whole life, universal life or variable universal life (or convertible term life insurance) policy and get the highest offer possible. This person can also help you with other aspects of financial planning such as growing your IRA and minimizing your income tax.

First, though, you should have a discussion with your policy’s current beneficiaries and your loved ones so that they understand why you want to do this. This will have a major impact on yours personal finances and theirs.

Want to see how much you could sell your whole life insurance policy for? Try our instant life settlement calculator.

Chris Granwehr is the Founder of Dawn Life Settlements and a former senior manager with Mason Finance, an industry-leading life settlement provider in California. He's a member of the Life Insurance Settlement Association, and he has a passion for empowering customers financially through a faster, easier life settlement system.