Once the decision to sell your life insurance policy or cashing on a viatical settlement has been made, the next question that always arises: how do I go about doing this?
There are many reasons for wanting to sell your policy. You might need money now, or you may not be able to continue paying your premium. Whatever reason it may be, we’ve got you covered.
Some basic terms
Beneficiaries are the person or people –of your choosing– that will receive a cash payment when the covered person dies.
Face value is the amount of money the death benefit payout your beneficiaries would receive once you pass away.
Surrender value is the cash value of your policy minus any fees. This option means that you will cancel your life policy and will no longer be covered by your life insurance policy.
Who qualifies for life settlements
- Policy holders over the age of 70
- Active policy holders with a policy payout of at least $200,000
- Under the age of 70 (or with a policy payout of less than $200,000, or both) – with a significant health issue
The selling process
Once you have sold your life insurance policy, you will receive a cash payout that is larger than the cash surrender value but less than the death benefit. The buyer will take over payment of your premiums and will receive the death benefit when you pass away.
Depending on whether a broker or provider is handling the transaction there will be one big difference. Brokers will go out and get multiple bids on a policy to get the best possible price for the sale. Providers purchase life settlements. You could sell directly to a provider and bypass a broker. Most sales, however, are handled by brokers.
How does it work:
- Preliminary evaluation
Answer a few general questions about your health and your policy to determine if you qualify for a life settlement.
- Research and information
With your permission, your broker will gather your medical records and life insurance policy information in order to calculate the value of your policy.
- Valuation
Receive a formal purchase offer, based on the value of your policy. Decide whether to accept, reject, or counter the offer.
- Closing
Receive the documents required to complete the transaction, also known as a closing package. Sign and return the documents to the appropriate contacts for processing.
- Transfer of ownership
Accept the change of ownership through your insurance company. While the transfer of ownership is being processed, your life settlement funds will be held in an escrow account.
- Receive your settlement
Receive confirmation that the change of ownership has been recorded. Receive your cash payment!
How much will the payout be?
The amount of the payout will be decided by several factors.
- Your life expectancy, the statistical age that the policyholder is expected to live until and it is based on actuarial data.
- The face value of your life policy, which is the amount of money the death benefit payout your beneficiaries would receive once you pass away.
- How much the buyer expects to pay in premiums to keep the policy from lapsing.
How they are taxed
According to the Tax Cuts and Jobs Act of 2017, a profit from a life settlement is considered the difference between the premiums you paid and the lump sum payout you received when you sold your policy.
Part of the lump-sum payment you receive could be taxed like regular income and another part as capital gains.
It can be summed up in 3 steps:
- The lump-sum payment amount from the sale of the policy that is equal to the premiums you paid is tax-free.
- The lump-sum payment amount from the sale of the policy that is above the premiums you paid and up to the policy’s cash surrender value is taxed as ordinary income.
- Any money from the lump-sum payment that exceeds the prior two points is taxed as long-term capital gains.
Viatical settlements are tax free as long as the lump-sum payment is less than the death benefit.
If selling your life insurance policy is something that you are interested in, click here to get an estimate.
