Sell Your Life Insurance Policy? What You Need to Understand About Life Settlements

Selling Your Life Insurance Policy? What You Need to Understand About Life Settlements

Life has so many twists and turns and the only thing that’s certain is our eventual death. Even trying to plan for that can be tricky and sometimes we find ourselves wondering if we still need that life insurance policy. In fact, there are several ways to make your policy work for you and even to access your policy’s cash, including opting to sell a life insurance policy. First, there are a few things to take into consideration though.

 

Why you might Consider to Sell Life Insurance Policy

 

Most people don’t realize that they have the option to sell a life insurance policy as a potential way out when facing some key problems, including the ones below: 

  • No longer need death benefit payout
  • Facing a chronic or terminal illness
  • Financial issues

NO LONGER NEED DEATH BENEFIT PAYOUT

Life never stops throwing us surprises, both good and bad. For example, perhaps your mortgage has been paid off so you no longer have to worry about your family having a roof over their heads? Many people take out a universal life insurance policy to cover things like mortgages and even education fees. Once these are paid then you might decide that a death benefit payout for your dependents is no longer a priority so selling your policy becomes a viable option.
 

FACING A CHRONIC OR TERMINAL ILLNESS

One of the most common reasons for people choosing to sell life insurance policies is when they suddenly have huge medical expenses. Sadly, chronic or terminal illnesses can happen to any of us. Then again, some policies might have long term care as part of their extra benefits. It’s therefore worth reviewing the details before selling your life insurance.
 

FINANCIAL ISSUES 

Premium payments can be a huge drain especially if you’re struggling financially. Perhaps retirement is more costly than you anticipated? Having said that, some people decide they no longer need a death benefit payout for their dependents but on the other hand, they want to enjoy their retirement. Selling your insurance policy for cash can be a great way to get extra money.
 
Then again, in those cases, you could also look into simply withdrawing money from your cash value or borrowing against it. Sometimes, it’s worth also investigating those options with your life insurance company. One word of caution though. Even if cancelling your life insurance policy is technically possible, you usually only receive what’s known as a surrender value. That’s usually a lot less than if you sell your life insurance policy. That’s why people choose to sell their life insurance policy over simply cancelling it. 

Pros and Cons of Opting to Sell Life Insurance Policy

Everyone’s situation is different and you’ll have to work out what the impact of selling life insurance does to you and your family. Nevertheless, there are some common themes that people consider when facing the question ‘do I sell my life insurance’, as detailed below: 

  • Receiving a lump sum versus losing your death benefit payout
  • Potential loss of other benefits 
  • Possible tax bill versus losing an investment vehicle 

RECEIVING A LUMP SUM VERSUS LOSING YOUR DEATH BENEFIT PAYOUT

Naturally, receiving a lump sum today can be a huge relief in many ways. Regardless, try to remember that getting a lump sum now means not getting the death benefit. . Sometimes, it’s not a clear cut answer but if the advantages of receiving a lump sum outweigh the benefits of a payout then selling your life insurance might be the way forward. 

POTENTIAL LOSS OF OTHER BENEFITS 

Many whole and universal life insurance policies come with the option to include other benefits such as long term care or other medical support. Furthermore, you might be receiving state benefits that depend on your current financial status whereas receiving a lump sum when selling your life insurance could adversely impact that. 

POSSIBLE TAX BILL VERSUS LOSING AN INVESTMENT 

On paper, a permanent lifelife insurance policy might look like a long list of premium payments. In fact, it’s an investment portfolio because part of your premiums goes into what’s known as a cash value. This cash can even give you dividends, depending on the life insurance company and your terms, although of course, the overall performance is much less than with a normal investment portfolio. Moreover, you can borrow against this cash or simply withdraw money directly. That will, however, reduce your final death benefit payout. 

What you now need to ask yourself is if a lump sum is worth more than the investment vehicle you’ve created with your life insurance policy. In addition, your lump sum might have parts of it that could be taxed. Essentially, you’ll need to talk to your broker or financial adviser to get the calculations so that you can compare like with like.

What Impacts How Much you can Get from Life Settlements 

When you sell a life insurance policy, it’s known as a life settlement. That’s when a third party buys your policy from you, along with the premiums and final death benefit payout. They see it as a long term investment and are therefore willing to pay for it. How much they’ll pay will depend on a few key points, as detailed below: 

  • How long you’ve had your policy and its current value
  • Your life expectancy
  • Final calculation 

HOW LONG YOU’VE HAD YOUR POLICY AND ITS CURRENT VALUE

The longer you’ve had your policy means that you’ve had more premium payments to build up your cash value. This helps investors, or life settlement companies, offset future premium payments so they’re usually happy to offer you more. The cash value can also grow because your insurance company will invest it on your behalf. 

YOUR LIFE EXPECTANCY

Essentially, a life settlement company wants to receive your death benefit payout sooner rather than later. Therefore, they’ll want to know the estimated payout date. Of course, no one can absolutely predict this but any life settlement company will ask for your health certificate to help them make a judgement.

FINAL CALCULATION 

This can get quite complicated but you can find online calculators to help you estimate how much your life insurance is worth. That won’t guarantee how much you can expect to receive from a life settlement but it will give you an idea. As a brief summary, it’s a calculation that takes into account all future premium payments as well as your death benefit payout and market interest rates. This then gives investors a sense of how much return they can expect from your policy’s cash flows.

How to Qualify for a Life Settlement 

Before you jump into a life settlement, you’ll need to confirm that you actually meet these requirements:

As you can see, the requirements aren’t complicated but they give investors a sense of your life expectancy as well as the potential worth of your life insurance policy. It’s worth noting that if you’re younger than 70 but facing a terminal illness then you can opt for a viatical life settlement. It’s essentially the same thing but it assumes you have a life expectancy of 2 years or less. 

One of the key points to note though is that you can’t sell a term life insurance policy. These policies are simpler than permanent life insurance policies but, most importantly, they don’t have a cash value. At the end of the day, that’s what gives your policy value. Nevertheless, you can convert most term life insurance policies into a permanent life insurance. Whether it’s then a whole or a life insurance policy doesn’t matter and depends on what terms you want to agree on. The first step in these cases is to check the details of your term life insurance policy with your insurer.

The Process to Sell Life Insurance Policy 

Once you’ve decided to go ahead, and that you meet the criteria, a life settlement process is actually relatively easy. You can expect to go through the following steps when you sell a life insurance policy

  • Get a valuation and several quotes  
  • Accept an offer and sign the closing package 
  • Transfer of ownership and lump sum

GET A VALUATION AND SEVERAL QUOTES  

First, you’ll need to get some numbers. You can of course do some research yourself and talk to a life settlement broker. If you want to investigate things yourself then, as mentioned, you can use online calculators to get a sense of how much your life insurance policy is worth. From that, you can then talk to life settlement companies and get some quotes from them to compare. 

ACCEPT AN OFFER AND SIGN THE CLOSING PACKAGE 

When you’re happy with an offer than simply tell that life settlement company and ask for the closing package. You’ll have some life settlement paperwork to do that essentially liberates you from your life insurance policy. 

TRANSFER OWNERSHIP AND LUMP SUM

The final step when doing a life settlement is the easy part because the paperwork is all signed. Your policy’s beneficiary names have been changed and you get a bank transfer of your final lump sum.

Life Settlement Company or Broker? 

Whilst the life settlement process has some simple steps you can follow, the details can get complicated. Of course, this depends on the situation. Regardless, sometimes it’s worth looking into working with a broker who can help you through the details. Nevertheless, you essentially have these two following options to choose from: 

  • Search top local life settlement companies yourself

OR

  • Get support through the process and top deals from a broker 

These days, you can find out most things online. Having said that, life settlement brokers have inside knowledge. They can also leverage their network and contacts to find deals that you might not be able to get yourself when selling life insurance. Furthermore, don’t underestimate the value of having an expert by your side through the life settlement process. 

Key Takeaways for Deciding to Sell Life Insurance Policy 

When selling a life insurance policy, you first have to confirm that you qualify for a life settlement. Then, it’s a question of weighing up all the pros and cons of giving up your death benefit payout versus getting a lump sum. It’s also useful to get an estimate of your policy’s cash worth as well as what some of the other options, such as taking out a loan, could provide. Either way, a life settlement is a solid strategy. Overall, you can expect to receive more than the surrender value of your life insurance policy. It’s also a great way out if you’re facing financial or health issues and sometimes, we all need help today rather than in the future.

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