For many life insurance policy owners, the answer is yes, you can sell your life insurance policy for cash. It’s known as a life settlement, and it’s a great way to get money for your unwanted policy, much more money than if you were to surrender it back to the insurance company. Most types of policies qualify for a life settlement, even term policies!
In this blog, we’ll walk you through how life settlements work, how your policy value is calculated, and what you need to know when deciding whether to sell your policy.
What is a life settlement?
A Life Settlement is the process of selling a life insurance policy to a third-party buyer for a cash payout that is more than the policy’s cash surrender value but less than the total face value of the policy.
There’s a very similar process for selling a life insurance policy that you may have heard of, known as a Viatical Settlement. While similar to a life settlement, a viatical settlement is the process of selling a life insurance policy to a third-party buyer where the insured has a chronic or terminal illness.
While the viatical settlement overall process is mostly the same as a life settlement, the tax implications and state regulations differ drastically.
Life settlement provider vs. life settlement broker
There are two options available when it comes to selling your life insurance policy: You can go directly to the company that will be purchasing the policy – known as a life settlement provider – or you can approach a life settlement broker who will act on your behalf to contact multiple providers to receive competing quotes.
Depending on your situation, a broker may be a good choice, but they will take a percentage of your settlement as a commission – sometimes 20% or more. That could be a huge amount of money depending on the value of your policy.
However, if you don’t mind doing minimal legwork, going directly to a licensed provider may be your best bet for maximizing your payout.
How does selling my life insurance policy work?
Whether you’re considering selling your life insurance policy due to affordability issues or you simply no longer need the policy, the process of selling a life insurance policy begins with finding an interested buyer.
There are many ways to find a potential buyer, but the easiest way is what you’re doing right now – researching the life settlement industry. When you sell your policy to a licensed life settlement provider, you will be working with experienced professionals who have a deep understanding of the specifics of life settlements.
To get started with a life settlement company, you’ll first need to check that you meet the minimum qualifying factors, such as:
- Own policy with a death benefit of $100,000 or more – anything less than that typically doesn’t qualify unless there are significant health impairments.
- According to the U.S. Government Accountability Office (GAO) life settlement market study, people who sold their life insurance policies were generally over age 60.
- A decline in health from the time your policy was issued can help improve your chances to qualify, but it isn’t required.
Because each case is unique, these factors should only be viewed as general guidelines, and bear in mind that anyone factor can outweigh another. For example, being much older than 65 could outweigh the need to have had a decline in health. You can find out if you meet the minimum requirements by submitting your policy for a free evaluation now.
This initial qualifying step is meant to save you time and protect your privacy. Because you’ll need to submit several personal documents throughout the life settlement process, it’s best to know whether you meet the minimum standards before handing over personal health documents.
The process for selling your life insurance policy.
Once you know if you qualify, the next steps usually will look something like this:
1. Detailed health questionnaire
If the basic qualifying factors are met, you’ll complete a detailed health questionnaire that provides a more in-depth look at the insured’s health.
The insured and the policyowner (if different from the insured) will need to authorize the life settlement provider to access medical records and contact the insurance company on the policyowner’s behalf.
3. Insurance Policy Review
You’ll need to provide a copy of the policy contract and a premium illustration. These documents will provide more insight into the specifics of your policy and can be acquired from the insurance company if you don’t have copies available.
This is the process of evaluating all the specifics of the policy and medical records to help determine value and calculate an approximate life expectancy for the insured.
Once the life settlement provider has all the necessary information and would like to proceed with making an offer, your dedicated representative will present the specifics of the offer and explain next steps. You can accept the full cash offer or opt for an alternative such as a Retained Death Benefit where you can receive a smaller cash payment while also keeping a portion of your policy’s benefits with no future premium obligations.
The closing process is the actual transfer of ownership of the policy and all the accompanying documentation. During the closing, your settlement payment will be placed in escrow until the insurance company has verified the change of ownership. Once verified, your settlement payment will be released from escrow.
How much can I get from a life insurance settlement?
The amount of cash you may be offered for your policy can vary greatly based on the specifics of your case. There’s no standard settlement ratio or payout amount, so there’s unfortunately no reliable way to provide an accurate estimate of what your policy may be worth until you go through the evaluation process.
However, according to a study by the London Business School, policy owners who sell their policy in a life settlement transaction generally receive on average four times more cash than they would get by surrendering their policy.
You may have encountered life settlement calculators while researching life settlements, but you shouldn’t rely on any estimate you may have received using them. Life settlement calculators are based on very limited information and are almost always inaccurate. Instead of providing an unrealistic estimate using a calculator, let’s take a look at how each qualifying factor can impact the value placed on your policy.
Life expectancy is the estimated number of years someone can expect to live based on current health conditions, lifestyle, and age. Life expectancy is calculated by an experienced underwriting team using the insured’s health information, current age, and information regarding longevity. The longer the insured’s life expectancy, the more premiums the provider will need to pay, resulting in a policy that is worth less.
Age of the insured
Excluding major health issues, a much older insured can expect to receive a higher payout than a younger individual in similar health with a similar policy. That’s primarily due to life expectancy and estimated premium obligations.
Health of the insured
The insured’s current health is important not only because of its weight in the life expectancy calculation, but also because the insured’s health at the time the policy was issued relative to today could uncover value within the pricing illustration. Because of this, the insured’s health is a major factor in determining your policy’s value.
Your premium schedule was determined when you first purchased the policy and is part of your life insurance contract. It outlines the premium obligations for the duration of the policy and any rate increases that will arise during the insured’s lifetime. Higher premium expenses reduce the amount the provider can afford to pay for your policy.
Expected premium payments
Using the premium schedule and life expectancy, the provider can determine the estimated total premium payments needed throughout the insured’s lifetime to keep the policy in force. The more the provider expects to pay in premiums, the less they’re able to pay up front.
As basic as it may seem, the larger the policy, the larger the payout. That’s because the payout can be looked at as a percentage of total face value. For example, the payout for a $1,000,000 policy will be greater than that of a $100,000 policy if all other factors are the same and assuming both settlements were valued at 30% of face value. In this situation, that’s the difference in $30,000 or $300,000.
While almost any type of life insurance can qualify for a life settlement, the type of policy can impact not only eligibility, but the size of the payout as well.
Selling a whole or universal life insurance policy
When it comes to permanent policies that can build cash value, the size of the cash reserve can be a determining factor in whether the policy qualifies and how much you could get selling it. A life settlement provides more money than the cash surrender value, but less than the total death benefit. Learn more about selling a whole or universal life insurance policy.
Selling a term life insurance policy
When selling term life insurance policies, the policy will usually need to be convertible, except in the case of a viatical settlement. If the insured has a terminal illness, a non-convertible term policy could qualify.
Other policy types, such as group or keyman policies, will need to be evaluated on a case-by-case basis.
Length of ownership
Depending on the state in which you reside, you may be subject to a two- to five-year waiting period from the date you originally purchased the policy before you can sell it. This is determined by state law.
Why do people sell their life insurance?
You need money for retirement
Northwestern Mutual’s 2019 Planning & Progress study revealed that 15% of Americans across all working generations haven’t saved anything for retirement. Fidelity Investments estimates that a 65-year-old couple retiring today in good health would need $285,000 just to cover health care expenses alone during their retirement. The combination of no savings and increasing health care costs is a dangerous combination for many of America’s seniors.
While younger workers still have time to pad their retirement accounts to make up for increasing health care costs, that ability is limited for those nearing or already in retirement. Luckily for them, life settlements may be a viable option to provide a quick injection of cash into their retirement savings.
Preparing for unexpected expenses
Life can be unpredictable and planning for what may come your way isn’t always a straight-forward process. Coupled with the fact that health care, long-term care, and medical care costs are rising much faster than inflation, unexpected expenses are quickly becoming a major concern for seniors. To combat this uncertainty, many seniors choose to sell their life insurance policy to create a safety net and mitigate any potential financial burden they may place on their family.
There was recently a congressional bill proposed that would allow seniors to roll their life settlement proceeds into a tax-free health planning account. If it becomes law, it would likely save seniors hundreds of millions of dollars that they could then use to pay for health care and long-term care expenses throughout retirement.
You no longer need the coverage
Life insurance is often purchased as income protection to cover living expenses for families in the unlikely event a catastrophic event occurs. However, as that reason for purchasing the policy changes or goes away entirely, it may no longer be necessary to maintain the policy.
And even if you’d like to maintain coverage, the policy you purchased to accommodate your situation years ago may no longer be the best or most affordable option. Selling an unneeded policy can help recoup some of the premiums paid in over the years. If you’d like to maintain coverage but not the premiums, there are other options to sell your existing policy, such as exchanging your current policy for a combination of cash and a paid-up death benefit amount with no future premiums.
Your term conversion deadline is approaching
Term policies are the most popular type of life insurance policy sold. These are affordable policies that cover you for a set period of years, and once that term expires, the policy will either go away or you can convert it to a permanent policy. The premium cost at the end of the term is usually much more expensive and often unaffordable for many seniors on a fixed income.
If you own a term policy that is approaching the conversion deadline, you can potentially sell it for cash or exchange it for a new policy with a much lower premium or, in some cases, no future premium obligations at all.
Your policy is no longer affordable
Life insurance policies will often include a built-in premium rate increases that trigger as you grow older. Depending on the type of policy and your premium schedule, those increases can be substantial and often unsustainable in retirement. Many seniors are forced to either lapse their policy or surrender it for its accumulated cash surrender value if any. Life settlements are often a much better option since they provide an average of 4X more cash than the surrender value.
How can you use the money from a life settlement?
In the 1911 U.S. Supreme Court Case Grigsby v. Russell, it was established that life insurance is personal property, and can be sold and transferred just like any other investment or property. And just like the cash you’d get from selling your home or automobile, the money you get from selling a life insurance policy is yours to use however you want. Whether that be to cover medical expenses, take a dream vacation, give to your grandkids to cover college tuition, or just to save it for a rainy day – the choice is yours.
Pros and Cons of Selling Your Life Insurance Policy
Life settlement pros
End premium payments
Life settlements do more than just provide a lump sum cash payment. They also relieve you from the obligation to pay expensive premiums.
Get more cash than surrender value
Life settlements provide on average 4 times more money than the accumulated cash surrender value.
Access to large amounts of cash
For those nearing or in retirement, a life insurance policy could represent an unexpected source of cash to supplement retirement income or pay down bills.
Recoup money you’ve paid in
If you were to lapse a term policy, you’d get nothing back from all the money you’ve paid in over the years. A life settlement can help you get some of your investment back instead of allowing it all to go to the insurance company as profit.
Life settlement cons
Potential tax liability
In most cases you won’t owe income taxes on life settlement proceeds unless the settlement is greater than the total amount you’ve paid into the policy over the years. However, we recommend that you speak with your financial advisor before pursuing a life settlement.
There could be fees or commissions
If you work with a broker instead of going direct to a life settlement provider, the broker will take a commission. Prosperity Life Settlements doesn’t charge any fees, nor does it receive any commissions from your life settlement proceeds.
You may lose eligibility for financial assistance
If you currently receive Medicaid or other types of financial assistance programs, check with a financial advisor who understands eligibility rules before accepting a life settlement offer.
Eliminates death benefit
Your beneficiaries will no longer receive the death benefit associated with the policy. However, if you elect to receive a partial cash payment in an alternative life settlement program, you could maintain coverage in addition to receiving a cash settlement.
Tips for selling your life insurance
Here are some tips to help you as you navigate life settlements.
1. Make sure the life settlement company is licensed.
Life settlements are regulated by the states rather than the federal government. You can contact your state insurance department to verify whether the company you’re dealing with is licensed in your state.
2. Speak with a financial advisor.
We recommend speaking with your financial advisor or tax expert before selling your policy.
3. There may be fees & commissions.
If you go through a broker rather than directly to a life settlement company like Prosperity, you could be paying large fees and commissions.
4. You won’t have coverage.
If maintaining coverage is important to you, there are alternative options you should consider, such as a Retained Death Benefit.
5. Be responsive.
There will be a lot of back-and-forth between you and the provider and potentially your healthcare providers and insurance company. The more responsive you are throughout the process and the more information you can provide on a timely basis, the smoother that process will be.
6. Speak with your family.
Your beneficiaries will need to be included in the process since they will likely need to sign a consent at closing.
Common life settlement questions
How long does it take to sell my policy?
The timeline is heavily dependent on how responsive the insured is and how quickly his/her medical providers and insurance company return requested documentation.
What if I’m desperate for cash and need to sell my life insurance policy fast?
In certain situations, your settlement can be expedited, or you could receive a cash advance. This is determined on a case-by-case basis and is not always available. You’ll need to speak with your life settlement representative to see if you qualify.
What if I change my mind after selling my life insurance policy?
The rescission period varies by state, but you usually have 15 days or more to change your mind and return the funds in full to regain ownership of your policy. Be sure to speak to your advisor and carefully read the purchase agreement.
How much money can I get from a life settlement?
Your payout is calculated based on an in-depth analysis of all available information, including the age and health of the insured, life expectancy, carrier credit rating, policy provisions, and the expected premiums required to keep the policy in force.
The London Business School found that life settlement participants received on average four times more cash for their policy by selling it than they would get from surrendering it for any potential cash value.
Alternatives to selling your life insurance
Not everyone will qualify or wish to pursue a life settlement. For those who do not, there are a few alternative options for you to consider when deciding what to do with an unwanted policy.
Surrender your policy for the cash value
Permanent life insurance policies may have a cash value feature built in. The cash value portion of the policy accumulates as you pay premiums over the years, and acts as a cash reserve or savings account. You can surrender your life insurance policy, which cancels it, in exchange for this accumulated cash value.
Before surrendering your life insurance policy, learn about additional surrender fees and possible tax ramifications of the payout.
Replace your policy with a better product
Insurance products and pricing change frequently. The policy you own now may not be the best or most affordable policy on the market. We can assist you with evaluating your options to replace your current policy with a new policy.
Borrow from the policy
If you don’t want to cancel your policy, but need access to cash, borrowing from the accumulated cash value may be an option.
Be aware that the loan may accrue interest, and if you don’t pay back the loan before you die, the death benefit is reduced by the outstanding amount owed.
Pay the premiums with the accumulated cash value
If you struggle to pay the premiums on your life insurance policy but don’t want to lose it, you may be able to use the accumulated cash value to cover the premiums.
It’s important to talk with your insurance company about this option so you fully understand how it affects your policy. Depleting the cash value by using it to pay premiums could cause a lapse in the policy, resulting in the loss of the death benefit.
Use accelerated death benefits
Accessing a life insurance policy’s accelerated death benefit may be a viable option if you are terminally ill. You’ll need to review your policy contract or speak with your insurance company to learn more about accelerated death benefits.
Pursuing a Life Settlement
If you decide that selling your life insurance policy is right for your current situation, Prosperity is uniquely positioned to help. Having structured or funded more than $40 billion in life insurance transactions, Prosperity is the leader and pioneer of the secondary market for life insurance.
You can get started right now by using our online policy evaluation tool.