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Can You Sell Your Life Insurance Policy For Cash

There may come a time when you may become short of cash to take care of an unexpected emergency.  The type of emergency that your emergency fund may not be able to cover. After reviewing all your assets including your life insurance policies, you may arrive at a decision to sell one or more of these assets. You must consider all your options. Can you liquidate your investments, obtain personal loans or a home equity loan? Can you sell your life insurance policy for cash? When faced with circumstances such as an illness that requires an immediate flow of money for medical bills. All options must be considered.

However, sometimes an insurance policy may become unaffordable to maintain. With all your other obligations maintaining a whole life policy may not be within your budget. Selling the policy may be a great option if there is a chance that the policy might lapse.  Hence, a more affordable Term Life policy might be better.    

Finally, your financial obligations may have changed. You may no longer need this type of insurance coverage. You might want to obtain a policy that meets your needs based on your current circumstances. Your children are grown and financially independent. You may have divorced your spouse, or they are deceased. Reviewing each of your available options should be done with great consideration as it can affect your financial situation and beneficiaries. However, we are only going to review the selling of a life insurance policy over other options. Let’s review the two types of settlements: Viatical vs. Life Settlement. We will also review the ways to get the process started.  Finally, the impact this choice will have on your family and immediate financial needs. Therefore, consult a financial advisor – can you sell your life insurance policy for cash?

Life Insurance Settlement

A life insurance settlement is the sale of an existing insurance policy to a third party for a one-time cash payment. The cash payout is typically more than the surrender value but less than the actual death benefit. Once the lump sum cash payout is accepted, the purchaser becomes the policy’s beneficiary. At this point, they will assume the payment of premiums. Upon your death, they will receive the policy’s death benefit. There are two types of life Insurance settlements, Viatical Settlement and Life Settlement.

Viatical Settlement vs. Life Settlement

There are two ways in which you can proceed to sell your insurance policy. Each has its own set of requirements to consider. However, life insurance policies are considered assets that can be sold like any other asset. When you decide to sell your policy, you will be given an upfront cash offer based on a life settlement calculator.

To qualify for a Viatical Settlement the insured on the policy must be terminally ill with a life expectancy of under 2 years. It is for people with a critical illness, i.e. cancer. Cancer treatment can be expensive, and this is a viable option to obtain additional cash from the face value of the policy. The upfront cash offer is typically 30 to 70 percent of the value of the insured’s death benefit on the life insurance policy. Hence, the settlement offer will be widely different for each policy. The settlement amount is also based on the terms and conditions of your policy. A Viatical settlement can take four to six weeks from start to finish.

For a life Settlement, the insurer selling the policy does not have to have a terminal illness.  This is the major difference between these two settlements. However, there are still qualifications to determine if your policy qualifies for a life settlement offer. There can be an inquiry into your current health situation that may require medical records. The process will take about three to eight weeks to complete to determine if your life insurance policy is a good deal for the buyer. They will be maintaining the premium payments for the policy until they can collect the death benefit from the insurance company. Therefore, your life expectancy is the most important factor to the buyer.

Life Settlement Regulations

In 1911, the Supreme Court decided that life insurance was personal property that could be assigned to an owner based on the discretion of the policy owner. It became an alternative to policy lapses due to nonpayment of premiums. It opened a whole new market for the insurance industry. This market would be regulated by the state you reside in. Currently, 44 states have state insurance departments that regulate the life settlement transaction.

Type of Life Insurance Policies

All types of policies can be eligible for a life settlement: Universal life, Whole life, Variable, and a Term Life insurance policy. There may be different conditions for each type of policy to determine if it will qualify for an offer.

Universal Life Insurance

Universal Life Insurance is a permanent life insurance. The policyholder is covered for their entire life as long as they pay the premium each month.  They may also have to meet additional requirements to maintain the coverage. In addition, universal life insurance has a savings component (cash value) associated with the policy for lifetime protection. During the duration of your policy, you may withdraw money or borrow from the money allocated towards the cash value of the policy.  The funds that go towards the cash value will also grow or decrease based on the interest rate of the current market.

Universal life insurance in some cases can be flexible with the premiums if the policy maintains a positive cash value.  You can lower or stop paying your premium for a certain amount of time. You can also adjust the policy’s death benefit. Based on a medical exam you might be able to adjust the death benefits of the policy. However, regardless of the amount of the cash value when you die, death benefits are paid out to your beneficiaries.

Whole Life Insurance

A whole life insurance policy, like Universal Life Insurance, is a permanent life insurance policy. However, the premiums and death benefits are fixed. The death benefits are guaranteed if the required payments are made. Since the policy builds a cash value, you may be able to withdraw money or take out a loan.

Your age and health conditions will determine how much coverage you are able to buy. These factors will determine the cost of the whole life insurance policy. A whole life insurance policy may have the flexibility to pay monthly, quarterly, or twice a year with a possible processing fee to facilitate the frequency of the payments.

Variable Life Insurance

Variable Life Insurance is a permanent life insurance policy with an investment component. The policy has a cash value that is invested, typically in mutual funds per Investopedia. This policy pays out death benefits like all the others when you pass away.

The value of the policy can rise, or fall based on current market conditions because it is invested mainly in mutual funds. Therefore, this type of policy is more risky than any other life insurance policy and will affect the death benefit amount. The payout amounts are based on the performance of the invested securities. Hence, this type of policy is more volatile than standard life insurance policies. Seek the advice of a financial advisor when purchasing this type of policy.

Term Life Policy

A term life policy is purchased for a set period of time at a set amount of money.  It is one of the most economical life insurance policies you can purchase. However, term life insurance policies have to be renewed or repurchased when the term is complete.  Hence, depending on your age and health the cost of the policy could increase. Your insurance agent or company will alert you when the term of the policy will be coming to an end.

Please consult an insurance agent or financial professionals for the best possible insurance option for you and your family.

The Best Candidate For Life Settlement

The sale of a life insurance policy may depend on the policy’s cash surrender value.  Only permanent life insurance has cash surrender value because it builds up a cash value over time. Therefore, they may be the best candidates for a life settlement.

For instance, a term life insurance policy may expire before the buyer can collect. This type of policy may not be renewable or will renew at a much higher rate than the original rate. However, it has the potential to be converted into a permanent life insurance policy. Consequently, this may have to happen prior to seeking a financial institution for settlement. Hence, the life settlement company may not wish to invest in this type of policy for these reasons alone.  

Life Settlement Company

The purpose of life settlement companies is to facilitate the sale of a life insurance policy. They represent the policy owner and may be bound by a fiduciary duty to work on your behalf. There are many companies that will allow you to submit your policy for a free evaluation. You can use Google to find various Life Settlement Companies. Investopedia recommends these four companies as the best: Coventry, Abacus Life Settlements, Magna Life Settlements, and Q Capital Strategies. Life Settlement Companies will walk you through their life settlement process to determine if you meet their eligibility requirements.  Most importantly they may want to know the following information:

  • Full Name
  • Phone Number
  • Email Address
  • Policy Death Benefit with at least $100,000 in death benefits.
  • Date of Birth: Are you at least 60 years old?
  • Health Status: Do you have any decline in health?
  • Gender
  • What type of policy?
  • How Long have you had the policy?
  • Is the policy from a current or former employer?
  • Health History: current ailments.
  • Are additional people insured on the policy?
  • Do you have any additional policies?

This is not an exhaustive list.  There may be additional questions asked.

Finally, visit the website of the NAIC, they provide expertise, data, and analysis for insurance commissioners to effectively regulate the insurance industry and protect consumers.

Life Settlement Brokers

Life settlement brokers must be registered and licensed. They should always be working in your best interest to get the highest value when selling your life insurance policy. They work on commission. Therefore, it is in their best interest to negotiate the best offer possible. They are a third-party entity that facilitates the entire process. Hence, it is their job to find a buyer through marketing your policy.  They must submit the paperwork for the application, negotiate all offers during the bidding process, and help with the closing of the deal. Remember, they are working for the policy owner and should work for this commission. Their commission is a set amount that is paid out from the proceeds of the sale. They will also absorb the viatical and life settlement valuation and underwriting.  This could cost thousands of dollars which you are saving.

The bidding process mainly consists of the broker marketing your policy to licensed life settlement providers. The quality and size of the brokers’ network are most important. He or she must have the connections to pitch your policy to premium-level buyers. The broker must also have the expertise to manage the auction successfully as an attractive policy could go through multiple rounds of bidding to procure the maximum amount of offers. If he or she is successful, the winning bid will be to your satisfaction.

Close of Settlement

Once a bidding process is completed, it will be up to you to accept the offers.  Each state will determine how much time you have to change your mind should you change your mind for whatever reason. If you elect to proceed there will be a few final steps to process before you receive the check.  This will be the closing process. Additional information will need to be submitted.

  • A letter of competency from your physician that you are capable of making this decision.
  • Verification of coverage from the insurer that the policy is active.
  • Signed offer sheet of the settlement provider’s bid details.
  • A signed life settlement contract of the purchase agreement.
  • The life expectancy reports provided by the medical underwriters are based on your medical history.
  • The change of ownership form or change of policyholder form is to be provided to the insurance carrier.

Should You Sell Your Policy

There are many factors to consider before you sell your insurance policy. First, make sure that this is the best option for you and your family.  As the owner of the policy, make sure that this payout does not impact any state or federal assistance programs that impact housing or your medical needs.  As for your family, there should be other financial options for your survivors to secure their financial future.  Take all of this and any other factors into consideration when deciding whether you can sell your life insurance policy for cash. Here are some pros and cons.  There could be others.

Pros

  • The Buyer assumes the premium payments.
  • There is a lump sum of cash.
  • A relatively quick turnaround.
  • Satisfy an immediate financial need, such as medical expenses, and retirement funds.

Cons

  • The settlement could impact your ability to receive state or federal assistance such as Medicaid.
  • Could impact your survivors’ future financial needs.
  • Can be costly depending on the difference between the settlement amount and the cash value of your policy.
  • The buyers will have access to a lot of your personal information including your health information.

Recap

A lot of moving parts go into making a final decision to sell your current life insurance policy. Therefore, you should research this entire process thoroughly.  I have provided enough information to get you started.  However, I advise you to delve into the entire process taking into account your current financial needs and your family’s future financial needs. Finally, take these steps to protect yourself.

  • Do your research using Google and government regulatory agencies.
  • Make sure your settlement broker is fiduciary.
  • Exhaust all available options including loans.
  • Limit as much personal information as possible.
  • Make sure the settlement offer meets or exceeds your needs.
  • Review the impact of the settlement does not affect your financial situation or your family’s.
  • Carefully review all settlement and closing paperwork in a timely manner.
  • Make sure you are able to change your mind and are able to back out of the deal.

This content is for information purposes only.  I do not endorse any of the companies mentioned.  Please research and do your due diligence. I do not get paid if you click any of the links.

Additional Reading:

How To Know If A Financial Advisor Is Fiduciary

How To Start Over At Fifty With No Money Tips

Credit Card Debt Forgiveness For Seniors

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