Life Settlements: Selling Your Life Insurance Policy
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Buying a permanent life insurance policy is a long-term financial commitment.
But if you’re unable to pay the premiums or no longer need life insurance, selling your policy is an option. Here’s how it works.
Sellers in life settlements are generally over 65, but younger people may qualify if they have certain medical conditions, according to the Life Insurance Settlement Association, or LISA. Universal life insurance policies and death benefit amounts over $100,000 are the most desirable, although term life and smaller policies can also be sold, LISA says.
Life settlements are often pooled together and owned by institutional investors, like banks or insurance companies, although some are owned by individuals.
A similar transaction, called a viatical settlement, is only for those with a terminal illness who expect to live another 24 months or less. And "surrendering" a policy is also a different action, in which you contact the insurer to end a policy and receive a portion of the cash value (if there is any).
How life settlements work
Life settlement transactions can be handled by either a broker or a provider. The main differences, according to LISA, are:
Brokers solicit multiple bids on a policy to get the best sale price. Most sales are handled by brokers.
Providers are purchasers of life settlements. You could sell directly to a provider and bypass a broker.
Once you find a broker or provider, here’s the general process:
You’ll provide details of your life insurance policy, along with medical records, to either a life settlement broker or provider.
If you’re using a broker, he or she will shop the policy to potential buyers. Buyers will calculate your life expectancy based on your medical records.
If you receive an offer, you can sell your policy.
You will make the buyer the new policy owner, and the buyer will start paying your premiums. It’s possible the buyer could resell the policy to someone else who will pay the premiums.
You will then occasionally have to check in with the buyer to confirm you are still alive. For example, the buyer might periodically send you a postcard that you need to sign and return. This is something you can discuss with your broker or buyer before selling.
When you die, the owner will receive your death benefit.
Life settlement amounts
How much you’ll be offered depends on your life expectancy, the face amount of your policy and how much the buyer expects to pay in premiums while you’re alive.
Some of the money from a life settlement may be taxed as income or capital gains.
Potential pitfalls of life settlements
Selling your life insurance policy is a way to make money, but there are some drawbacks:
It can be tough to determine whether you’re getting a good price for your policy.
The commissions involved can eat up as much as 30% of your life settlement, according to the Financial Industry Regulatory Authority.
You’ll likely have to pay taxes on the money you receive from a life settlement, while the death benefit of a life insurance policy is tax-free to your beneficiaries.
If your family members still rely on you financially, they’ll be left without the safety net of the life insurance payout when you die.
If you rely on public assistance, a life settlement could make you ineligible.
What to ask before selling your life insurance policy
It’s possible to get a good deal on a life insurance settlement, but before you sell, ask yourself a few questions:
Do you still need the coverage? If you can afford the premiums and you have beneficiaries who rely on you financially, you’re better off keeping the policy.
Are there other ways to pay your premium? When life insurance premiums become unmanageable, there are alternatives, such as taking loans from your policy or reducing your death benefit in exchange for lower premiums.
Can you trust the broker and buyer? Look for a broker who is licensed through your state insurance department, and know how much of your personal information the buyer will access. Don’t work with a broker or buyer who rushes you into a decision.
Selling your life insurance policy safely
Follow these steps to make sure you get the best deal if you really want to sell your life insurance policy:
Avoid responding to life settlement solicitations. It’s better to find a life settlement broker through your financial advisor or insurance agent, who might even be licensed to do life settlements.
Get multiple offers. A life settlement broker can shop your policy around. That way you have a better understanding of what your policy is worth.
Research your broker’s license status and any complaints against him or her through your state insurance department. The National Association of Insurance Commissioners has department contact information.
Remember that you don’t have to sell your policy just because you receive a bid.
Updated Jan. 6, 2017.
