16 Dec Can I Really Sell My Life Insurance Policy?
Purchasing life insurance is one of the biggest financial purchases you make, but are you stuck with it forever? Can you actually sell a life insurance policy if you don’t want or need it anymore?
The quick answer is YES, you can sell your life insurance policy.
And, no, it isn’t a scam.
Essentially, a life insurance policy is personal property, so just like any other personal property, it’s yours to sell.
However, just like selling a car or a home, there are a lot of things to consider (and hoops to jump through).
Selling a life insurance policy is also called a life settlement. And life settlements are probably more popular than you realize.
According to Harbor Life, “The life settlement industry is growing 34% per year on average.” However, “More than half of Americans don’t know they can sell their life insurance.”
Unfortunately, many people who can either no longer afford life insurance premiums or have no beneficiary who needs life insurance will simply surrender their life insurance.
Harbor Life explains, “85% of term policies and 88% of universal life policies will expire, lapse, or be surrendered before a death benefit is paid [and] $200 billion worth of life insurance will be surrendered or lapsed annually through 2027.”
Rather than allowing this to happen with your life insurance policy, it is smart to ask, “How can I sell my life insurance policy?”
Keep reading for more info on life settlements, whom they are ideal for, and how they work.
What Is a Life Settlement?
A life settlement is the sale of a life insurance policy by the policy owner to a third party.
If you are the seller, you typically will get more than the cash surrender value of the policy but less than the amount of the death benefit.
Then the third-party buyer continues to pay the policy’s premiums and collects the death benefit when you die.
Are Life Settlements Legal?
A common misconception of life settlements is that they are illegal. But they are considered a legal transaction.
It was made legal in a 1911 Supreme Court ruling that life insurance policies are like property, and can be transferred by the owners.
Also, the life settlement industry is heavily regulated.
Many states have strict requirements, such as requiring life insurance policyholders to own the policy for a certain number of years before they are allowed to sell it.
Forbes explains, “A majority of states require a two-year waiting period from the time a life insurance policy is issued to when it can be sold. […] Ten states have a five-year waiting period. Plus, most states provide substantial consumer protections and require life settlement providers and brokers to be licensed.”
What Are Some Reasons for Choosing a Life Settlement?
If you are unable to afford the premiums, you may want to sell your life insurance policy instead of letting the policy lapse and be canceled.
A life settlement on your policy could end up getting a cash payment from an investor.
You may also choose to sell your life insurance policy if it is no longer needed.
There may come a time when the reasons for having the policy don’t exist anymore, such as having adult beneficiaries who will no longer need the financial assistance after you pass away.
Another valid reason to sell your life insurance policy is in the event of an emergency. 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.
Sometimes, where you work or no longer work plays a role in the decision.
This is typical for people who no longer work for the company where there are employee insurance policies held by companies on key executives/partners. By taking a life settlement, the company can cash out on a policy that is no longer needed.
When it comes down to it, it’s abou the money.
The amount you’ll receive from a life settlement will be far more than what you’d get by surrendering the life insurance.
To put it another way, Harbor Life reports, “Life settlements pay policyholders 4X more on average than the cash surrender value.”
[Related Read: How Much Life Insurance Do I Need?]
How Do Life Settlements Work?
Given the regulations, you may be wondering, “Is it possible for me to sell my life insurance policy?”
Basically, you need to be old enough or sick enough for investors to be willing to take on the risk of buying your policy. Most companies require you to be at least age 65 to sell life policies, and the average age is 75.
The life settlement process is broken down into three sections: Eligibility, Offers, and Closing (settlement).
Eligibility
First, you must qualify (or be eligible) for a life settlement.
Here are some examples of who qualifies for a life settlement with most companies:
- Age: At least age 65.
- Health status: Traditionally, life settlement companies will look for someone who has had a change in health status since the original policy was taken out. Maybe you now have heart issues or have been diagnosed with a form of cancer. However, you don’t have to be sick to qualify for a life settlement.
- The face amount of your life policy: Most companies require at least a $50,000 death benefit on your life policy to qualify.
- Type of policy: There are many types of life insurance policies that qualify for a life settlement, including universal life, whole life, and term life with a conversion feature.
- Resident state: Some states require that you own the policy for a minimum of two years before you can sell it. A few states mandate that an insurance company notify you that you may qualify for a life settlement instead of surrendering your policy or letting it lapse.
Offers
Once you determine you qualify for a life settlement, now it’s time to find your best offer. Here you will have to give up some personal information to the life settlement provider or broker to get a firm offer.
This information could include:
- Completing an application
- Providing medical history
- Providing policy information
Note: Some companies could require complete medical underwriting to get an offer.
Once all this information is received, it may take from a few hours to several weeks for healthy people to get a firm offer.
Closing
This is also considered a settlement with some companies.
Now that you have an offer, and you have accepted it, you will complete some closing documents.
This will be done with the life settlement company (or with a broker if you are working with one).
Once this is complete, the funds would be placed into an escrow account until your life insurance policy is transferred to the new owner.
Where Can I Sell My Life Insurance Policy?
You can sell your life insurance policy through a life settlement company (also called the provider) or through a broker.
Note – Life settlement companies and brokers must be licensed.
The offer amounts will vary greatly from one life settlement company to the next, so it is important to shop around.
Your broker should shop all the available companies to get you your best offer.
Keep in mind that the broker will get a commission (which also varies), so be sure to ask the broker what the commission is and if there are any other fees.
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