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A life insurance policy is your personal property.
That means you’re able to sell it like any other asset.
Heres everything you’re gonna wanna know.
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What Is a Life Settlement?
Selling yourlife insurancepolicy to a third party is known as a life settlement.
As you might have guessed, theres a catch.
Transaction costs can be high and your heirs wont receive any money from the policy when you die.
Youll never receive the full death benefit amount when you sell your policy either.
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Still, for seniors on fixed incomes, pursuing a life settlement can create much-needed cash flow in retirement.
How Do Life Settlements Work?
They also receive the policys death benefit when you die.
Life settlements are targeted toward older adults with high-value life insurance policies.
Younger people with a chronic or terminal illness may also qualify to sell their policy.
Some states have longer waiting periods.
Selling life insurance policies isnt as common as you might think.
Only about 3,000 policies were sold on the secondary market in 2021, according to theLife Insurance Settlement Association.
In fact, life settlement companies will often paymoreif you have a significant health issue that lowersyour life expectancy.
Basically, the older and sicker you are, the larger your potential payout.
Pretty morbid, right?
Maybe, but selling and buying life insurance on the secondary market is big business.
And some types of policies are more valuable than others.
Universal life policies accumulate a cash value that can be used later to cover premium payments.
Whole life insurancepolicies andterm life insurancepolicies, in contrast, dont offer this premium flexibility.
Why Do People Sell Their Life Insurance Policies?
Money is the driving force behind selling a life insurance policy.
Policyowners may find it difficult to afford the premium payments or simply need cash.
Many older adults need extra income in retirement.
Thats why life settlements are also called senior settlements.
People also sell their policies because their life circumstances have changed.
Before entering a life settlement, double-check you and your family no longer need the protection your policy provides.
Life Settlement vs. Thats called letting it lapse.
Permanent life insurance policies build up a reserve of money known as a cash value.
(It will be much less than the policys death benefit.)
Just like surrendering your policy, youll get much less than the death benefit amount.
How to Sell Your Life Insurance Policy
There are two ways to sell your life insurance policy.
Buyers can then make offers on your policy based on your health and your policys value.
The entire life settlement process can take 30 to 90 days to complete.
Just remember:Life settlement providersalso charge a commission.
(The advantage is youll pay only one commission instead of two.)
It requires more work on your part though.
Youll need to shop around and get multiple offers before selling your policy.
you might find licensed life settlement providers through the Life Insurance Settlement Associationsmembership directory.
Get an appraisal in advance, so you know when a buyer is underbidding, Flagg said.
Its protection against being cheated out of the full fair-market value of your policy.
Life Settlement Brokers
Most settlement sales are handled by brokers.
So if you sell a $100,000 life insurance policy, you could receive $10,000 to $35,000.
Youll never get the full death benefit amount when you sell your policy.
Are Life Insurance Settlements Taxable?
Heres how it works.
The amount received from a life settlement is tax-free up to the premiums youve already paid into the policy.
This is called your cost basis.
Lets say youve paid $10,000 in premiums since you bought your policy.
If you sell it for $20,000, the first $10,000 of that sale isnt taxable.
After that, the amount up to your policys cash surrender value is taxed at your ordinary income rate.
The rest is taxed at the capital gains tax rate.
The settlement wont be taxed at all if proceeds are less than the cost basis.
Generally, viatical settlements are spared from taxation.
If you receiveIRS Form 1099-LTCafter selling your policy, the proceeds are usually tax-free.
Here are the pros and cons of selling your life insurance policy.
Call your insurance agent or insurance company and ask if your policy has any cash value.
Probably not as good as youd like.
It always seems like an uphill battle to build (and keep) a decent amount in savings.
But what if your car breaks down, or you have a sudden medical bill?
Ask one of these companies to help…
