Can I Sell My Life Insurance Policy?
Yes, but it depends on the circumstances and the policy itself. Universal Life policies are usually the most preferred type of policy for life insurance buyers; however, any policy can be sold and are subject to the terms of the buyer.
A life insurance policy is an important financial asset. The policy represents a claim to a series of potential future cash flows. Because the policy itself can be objectively categorized as an asset, this means that it necessarily ought to have some sort of monetary value. But how do you know how much your life insurance policy is worth at any given point in time? If you wanted to, could you potentially sell your life insurance policy in order to receive cash today?
The answer to these questions are not always entirely clear. Sometimes you can sell your life insurance policy, and sometimes you cannot—whether or not you can depends entirely upon your personal situation and the specific characteristics of the policy itself. Furthermore, in the instances that you can sell your policy, the amount of cash you will receive in return depends entirely upon what the market is willing to pay for it (which certainly changes over time).
How do I know if my life insurance policy is one that could be sold?
There are a few distinct variables that will directly impact your ability to sell your life insurance policy. Typically, you need to be at least 65 years old and also have a policy that is expected to last longer than you are expected to live. Though predicting the exact date you are going to pass away is obviously something that is beyond both your and your insurance company’s ability to do, this prediction is generally determined by your current health and the average life expectancy for your given demographic.
If you are a healthy 70 year-old and your life insurance coverage is set to expire when you are 71, then you are unlikely going to be able to sell your policy. However, if your coverage is set to last much longer than your predicted life span—for example, some people are covered until they are 100 even though they are unlikely to live that long—then your policy is something that may certainly have exchangeable cash value.
Other factors that influence the current exchange value of your life insurance policy are the total amount you are covered for, the amount (if any) of equity you have already accumulated, and the amount of premiums you still have due to pay. If the premiums due are relatively low and the coverage is relatively high (typically $100,000 or above), then your policy may be a very attractive asset to certain investors.
What are the pros and cons of selling my life insurance policy?
The most obvious reason you would want to sell your life insurance policy is that you no longer need the coverage and you would prefer to get cash today. If you have outlived your spouse, your children are grown and financially independent, or you no longer have any financial dependents, then it might make much more sense to exchange your policy for cash instead of continuing to pay for unnecessary coverage.
Typically your life insurance policy will be sold in the form of what is known as a ‘life settlement’. Typically life settlements are conducted through an exchange with a large financial institution that is willing to depart with a certain amount of cash today (the settlement) in order to have the legal right to your policy cash flows. These exchanges can be mutually beneficial because while you will be able to enjoy some of the cash value of your policy while you are still alive, the institution will be able to enjoy a return on its initial investment in the future.
The life settlement market is one that is worth over $1 billion annually, and it is one that has been able to help numerous senior citizens across the country. As is the case with essentially all financial exchanges, a life settlement isn’t without its pitfalls. In addition to getting less than your policy value upfront, you will typically also lose more value to taxes and commissions (sometimes as high as 30%). Additionally, because you will be without a life insurance policy once the settlement is complete, your family will lose the financial security that life insurance can provide.
When should I consider selling my life insurance policy?
Keeping all of these aforementioned pros and cons in mind, when deciding whether to sell your life insurance policy or hold onto it, you ought to begin by asking yourself a few important questions:
- Do I still need life insurance coverage? Deciding whether or not you need life insurance coverage is a personal choice based off of the number of dependents you may have, the degree of their dependency, and the rest of your current financial situation.
- Would anybody be financially hurt in the event of my death? Whether you have a spouse, children, or any other sort of financial dependent will greatly influence the risks and benefits of deciding to part with your life insurance policy.
- Are my monthly payments worth the coverage I am paying? Obviously, you want to drive down your monthly costs to the greatest extent you possibly can. If you don’t believe you are getting your money’s worth in coverage in exchange for the amount you pay each month, then selling your policy might be a good idea.
- What are the other financial assets I have in my portfolio? Life insurance is considered a financial asset, and therefore it is a part of your overall financial ‘portfolio’. A good portfolio is typically one that is diversified. If this is important to you, then you may not want to have cash as your only financial asset in the status quo.
- How much would it be worth to lose life insurance coverage? This question is one that is essentially a summation of all the others. Ultimately, a life settlement is going to give you money today in exchange for the benefits of your coverage in the future. Where the specific ‘line’ of what makes a good and bad deal exists, however, is entirely up to your subjective preferences.
Many financial institutions and advisors are willing to offer you a free estimate of the amount of money they would be willing to give you today in exchange for your life insurance policy (a valuable financial asset). It typically doesn’t hurt to shop around, and in fact, even if you are not particularly interested in selling your policy in the status quo, it might be a good idea to at least understand what your current options may be.
How much is my life insurance policy worth?
The current cash value of your life insurance policy is going to be influenced by a number of different factors, so there is no permanent answer to what such a value may be. However, there are a few usually guidelines that might help you be able to get a better idea.
Typically, you can expect to receive about 20%-25% of your policy benefit up front, in cash. This means that if you have a policy benefit that is worth $200,000, then you will be able to ‘cash out’ for somewhere in the neighborhood of $40,000-$50,000.
Would you rather have $40,000 in cash today or $200,000 in coverage for the future? The answer to such a question will obviously depend on your personal circumstances, and there is no single answer that can be applied to all people. Furthermore, the actual cash value is still going to depend on your age, monthly payments due, taxes, commissions, and market demand.
Even keeping all of these things in mind, if you are able to get an offer that you deem to be fair for your life insurance policy, then selling it is a perfectly legitimate option. Even if this is not the case, you still have a number of acceptable options available.
What are some different ways to sell my life insurance policy?
The Life Insurance Settlement Agency (LISA) recognizes that institutions typically prefer to buy universal life insurance policies with benefits over $100,000 from people who are over the age of 65. However, because there are people outside of these circumstances who are still looking to sell their life insurance policies, there are an ample number exceptions to these general rules of thumb.
Whether you are looking to sell the preferred universal life policies that the markets are demanding, or you are looking to sell a different kind of policy, there are generally two different types of buyers (categorized as brokers and providers).
Most sales are handled by brokers who are individuals who try to solicit multiple bids on a given policy, and then will sell the policy to the highest bidder. Using a broker can help you get a better overall deal for your policy, though they will typically demand some sort of commission fee in exchange.
But if you are looking to bypass the commissions or restrictions of a broker, you also have the option to sell directly to the providers themselves. By doing this, you are essentially settling with your insurance provider for a certain amount of cash today in exchange for them no longer having to pay the benefits of your policy upon your death (a sort of buy-out).
Naturally, your decision to sell or not sell your particular life insurance policy is a very important one that ought to be made keeping these numerous factors in mind.