Can You Sell Your Life Insurance Policy?
Yes, you can sell your life insurance policy. You may choose to do this if you can no longer afford to pay your premiums, no longer have a family that will receive the death benefit or do not want the policy. You will typically be paid a lump sum for selling.
The Process of Selling a Life Insurance Policy
When you decide to sell your life insurance policy, the process and selling will be known as a life settlement. In a life settlement, you give up the responsibility and benefits of a life insurance policy. This can be a good option for you if the cost of life insurance has become too much.
You won’t have to pay premiums anymore, but your family or beneficiary will no longer receive the death benefit when you die. That benefit will go to the investor who purchased the policy.
According to CNBC, a sold life insurance policy is placed in a blind pool managed by a financial organization. Next, it is sold to an investor and bundled together with other life insurance policies.
There’s no situation where an investor has your policy and is waiting on your death to receive a benefit.
How much money you receive from selling your policy varies – purchase date, your health, age and condition will be considered. But do not expect to receive near what your family would have gotten from a death benefit.
The motivation for an investor to buy your policy is to make money off the benefit, so your payout will be less and given to you in a lump sum.
It is also important to remember that the money you receive for selling your policy can be taxed, which can determine how much money you receive.
Alternatives To Selling a Life Insurance Policy
There are some alternatives to selling a life insurance policy if you still need money or would like to stop paying your premiums. One method could be to potentially take out a loan on your policy to receive money, but this could be risky and depend on how much money you plan to bring in.
You could also withdraw money directly from some life insurance policies, but this isn’t true for all types.
If your policy has a cash surrender value, you could also stop the policy and get some money back that way.
Pros and Cons of Selling a Life Insurance Policy
There are some very clear pros to selling a life insurance policy. First off, you no longer have to pay premiums. If this had been a significant expense or something you could no longer afford, then this is a massive benefit.
You will also receive a lump sum for your policy, which could be a substantial amount of money that you’ll have right away.
But there are also cons: You will have to pay taxes on the money that you receive. The money you receive will not be near the value of the death benefit, so you’re essentially trading in value. Also, your family or beneficiary won’t receive anything when you die.
The end result: You will have significantly less money than if you had held onto the policy.
But that can be worth it to no longer pay a premium, or for you to receive a large amount of money right now instead of years from the present.
What To Ask Before Selling a Life Insurance Policy
One thing you’ll want to ask yourself before selling your life insurance policy is if it is the best deal.
Also, the first offer you receive might not be the best. It’s worth shopping your policy around to see what your payout options are to ensure you’re not losing more value than necessary.
Make sure to also consider the tax implications. Depending on how much money you make, the money you receive could push you into a higher tax bracket and cost you a significant amount of money.
You should also evaluate if you are okay with your family and beneficiaries receiving nothing when you pass away. If you hope to leave them money, then you may want to look at other potential options.
3 Cited Research Articles
- Huddleston, C. (2020, September 6). Need Cash? Tap Your Life Insurance Policy. Retrieved from https://www.forbes.com/advisor/life-insurance/tap-cash-value/
- O’Brien, S. (2018, May 10). One option for your unwanted life insurance policy: Sell it. Retrieved from https://www.cnbc.com/2018/05/10/one-option-for-your-unwanted-life-insurance-policy-sell-it.html
- Texas Department of Insurance. (n.d.). Can I sell my life insurance policy? Retrieved from https://www.tdi.texas.gov/tips/can-i-sell-my-life-insurance-policy.html