Q

Can you sell your life insurance policy?

A

You can sell your policy to a third party for cash. The third party pays your premiums and receives the death benefit when you die.

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If you no longer need your life insurance coverage, it's possible to sell your policy to a third party for a cash payout. Selling the policy means your beneficiaries won't get the death benefit when you die.

Proceed with caution when deciding whether keeping your life insurance policy is worthwhile. Payouts for selling your policy are low and come with high overhead costs. Other options may be more valuable to you and your beneficiaries, such as using the cash value of your policy or lowering your premiums by reducing your coverage amount.

Key Takeaways

  • A life insurance policy sale is called a life settlement or viatical settlement

  • Life settlement brokers and companies buy policies from older and critically ill people in exchange for cash

  • Payouts are significantly lower than the death benefit and come with taxes and fees

  • Most people benefit more from reducing or canceling their coverage

How does selling a life insurance policy work?

Selling a life insurance policy is called a life settlement, sometimes known as a viatical settlement. You sell the policy to a third party for cash, usually a broker or settlement company. They pay your premiums and receive the death benefit when you die.

Expect to answer questions about your health. Unlike your life insurance underwriter, the life settlement company may offer you a better deal if you’re older or in poorer health. These third parties only profit after you pass away.

Buyers tend to purchase policies from people at least 65 years old, and often only from people much older than that. Your policy also usually needs to have a face value of at least $100,000.

Once the buyer pays you for the policy, your life insurance coverage ends.  

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Pros & cons of selling a life insurance policy

Whether you should sell your life insurance policy depends on your unique background and your end-of-life financial plans. Talk to your beneficiaries and a certified financial planner before making a decision.

Pros of selling a life insurance policy

The main benefit of selling your life insurance is that a life settlement can help you get some value out of a permanent insurance policy if you can't afford to keep or cancel it.

If you have term life insurance, it's simpler to let your policy lapse or cancel it, even if you’d like the extra cash. 

Getting a life settlement is an option if:

  • No one relies on your income

  • You have enough savings to self-insure

  • You can no longer afford a permanent insurance policy

Be certain that your beneficiaries no longer need your life insurance proceeds before considering a life settlement.

Cons of selling a life insurance policy

If you have a policy you can’t afford or don’t need, a life settlement may seem appealing. However, it’s generally more costly and complicated than it’s worth. 

  • Selling is difficult: Many buyers won’t purchase a policy unless they’re sure they can recoup their investment, so it can be hard to find a good offer.

  • Returns are low: The payment for your policy will be a small portion of your policy’s death benefit, sometimes just 20% to 25% of the face value. [1]

  • Brokers charge fees: Life settlement companies and brokers may take a commission from your payment; recent statistics indicate it can be as high as 30%. [2]

  • The sale is taxable: The payment you receive is usually considered taxable income and could affect your eligibility for public assistance benefits.

Be wary of unscrupulous life settlement providers who target seniors. These providers offer seniors cash to apply for a policy that pays out to a third party. Though they might argue that participating puts you at no risk, these agreements are broadly outlawed. 

Is selling a life insurance policy worth it?

For most people, selling your life insurance policy doesn't offer a valuable return — in fact, it could come with tacked-on costs that make it a burden rather than a financial gain. 

You're better off using traditional investment accounts, which have a higher rate of return, to access cash in retirement. If you can no longer pay for your policy, speak to an agent about ways you can alter your coverage to make it more affordable.

What are alternatives to selling a life insurance policy?

Most people will find canceling their current life insurance policy or finding ways to lower their premiums to be better and less complicated financial solutions.

  • Ask to lower your coverage amount: Not every provider offers this option, but reducing your coverage is an easy way to lower your premiums to fit your budget.

  • Cancel your policy: With term life insurance, you can cancel your policy or let it lapse with no penalty.

  • Surrender your policy: Whole life insurance owners may be able to surrender their coverage and receive some of their cash value in return, but it can incur fees.

  • Use your cash value: Some permanent life insurance allows you to pay premiums with your accumulated cash value if you can’t afford your premiums out-of-pocket.

  • 1035 exchange: If you can no longer afford your cash value policy, a 1035 exchange can help you trade for a less expensive whole life policy or annuity.

If you already sold your life insurance policy but are having seller’s remorse, you might be able to reverse your sale and reinstate your coverage. Some states require life settlement brokers to return your life insurance policy if you refund the settlement to them within a set period. Check with your state insurance department for details.

If you’re unsure whether selling a life insurance policy is the right move for you, speak to a financial advisor to learn more about life insurance and get answers to your questions.

Frequently asked questions

Can I sell my life insurance policy?

You can sell your policy to a life settlement broker or company if it’s worth $100,000 or more and you’re of a certain age. Seniors and terminally ill individuals will have the most success.

How much can I earn from selling my life insurance policy?

It depends on your death benefit amount and your overall health. Some brokers estimate you can make 20% to 25% of your policy’s benefit amount (before fees and taxes).

Is it worth it to sell your life insurance policy?

Most people won’t benefit from selling their policy because of its financial complications, which reduce the value of your sale.