Life can sometimes take us by surprise with its many ups and downs. You could therefore be facing the decision of whether to sell life insurance policy. The good news is that it doesn’t have to be an overwhelming decision partly because there are many experts to help you. Although, you can also easily get to understand the process, and some of the nuances, of selling your life insurance policy.
How does it work when you Sell Life Insurance Policy?
Just like for any process, there are a few key points to bear in mind before you get started with selling your life insurance policy, as detailed below:
- Life Settlements
- Verify your quality for a life settlement
- Term versus Permanent life insurance
The official term when you sell your life insurance policy is that you’re doing a life settlement. Essentially, this means that you sell your policy, along with its premium payments, to a third party. The advantage for them is that they get your death benefit payout when you die. It’s due to this payout that they’re willing to pay you more than the surrender value, which is what people get when they cancel their life insurance policies.
Verify your quality for a life settlement
Most people sell their life insurance because they need money. Although, before you can sell your life insurance policy for cash, you’ll have to make sure that you meet the basic criteria. They’re actually very simple. You need to be at least 70 years old and with an insurance policy value of at least $200,000. Having said that, you can be younger if you’re facing a terminal illness. That’s because those buying your life insurance policy are guaranteed a faster payout. In that case, you’ll be doing what’s known as a viatical life settlement when selling a life insurance.
Term versus Permanent life insurance
Another key point to note is that you can’t actually sell a term life insurance policy. You would therefore need to talk to your insurer to convert it to a permanent life insurance policy. That’s because a term life insurance policy isn’t valuable enough to investors. On the flip side, when you have a permanent life insurance policy, part of your premium payments goes into a pot, or a cash value which offsets any risk the investors might be buying. Although, it doesn’t matter if you convert it to a whole or universal life insurance because both are valuable to investors.
How Much can You Expect when you Sell Life Insurance Policy?
When selling your life insurance, you might want about how much money you can actually expect to get. Of course, the life settlement companies will decide what they’re happy to offer and each one will be different. Having said that, you can generally expect the following:
- More than your cash surrender value
- An amount that takes into account your death payout and premiums
More than your cash surrender value
When people are facing financial hardship, or no longer need their life insurance policy, the obvious reaction is to simply cancel their policy. In those cases, you’ll receive what’s known as a cash surrender value. This amount of money takes into account your premium payments to date as well as any charges to close your policy. This is much less than the amount you can expect from a life settlement. That’s because life settlement companies see it as an investment so they’re happy to pay more in order to access your death benefit payout. This is as long as they feel comfortable with your life expectancy of course.
An amount that takes into account your death payout and premiums
The good news is that you don’t have to do the calculation yourself and there are actually several online calculators that you can use to give you an idea. Of course, you won’t get the final offer because each life settlement company will have slightly different ways of coming up with their offers. Although, you can assume that the following factors are taken into account when calculating your policy’s value:
- Your age and health status
- Policy type and size
- Premium payments
- Your life insurance company
- Current market rates and the buyer’s risk profile
Potential Tax Implications when you Sell Life Insurance Policy
It’s worth keeping in mind any potential tax implications when you sell your life insurance policy. Although, you can rest assured that a good portion of your life settlement will be tax-free. The following summary is a good guide to get you started:
- The amount you paid into your policy is tax free
- Anything above but less than the cash surrender value is taxable at normal income tax
- Any value above is subject to capital gains tax
As mentioned, an online calculator is a useful tool. Afterwards though, you should first talk to your life insurance company and then a life settlement broker. Of course, you can approach life settlement companies yourself to get an idea of what possible offers you might be able to get.
Regardless, you’ll need to do a bit of research and talk to a few experts before you can make your final decision. After that, the life settlement company or broker will guide you through the paperwork and final transfer of ownership of your policy before you receive your lump sum.
Final Recommendations for when you Sell Life Insurance Policy
When people ask themselves, do I sell my life insurance policy, it’s of course a very personal decision. Once you’re ready to go ahead though, you’ll have to first check that you qualify for a life settlement. Then, you’ll want to have an idea of what potential tax bill you could be facing. Assuming you’re happy with the numbers, the process is relatively easy although, make sure you let the experts guide you. Find a good broker or life settlement company and everything follows on from there.