Did you know you can sell all or a portion of your life insurance policy, even term insurance?
(4 minute read)
Whether you no longer want your life insurance policy or you’re just looking for some extra cash, you may be able to recoup some of your investment by selling your policy to a third party (also called a life settlement). Life settlements are ideal when you have an immediate need for cash that outweighs your need for an active life insurance policy.
In this blog, we’ll offer some quick answers to common questions you may have about selling a life insurance policy, including how the process works and the pros and cons to consider when evaluating your options for life insurance settlements.
How Does Selling Your Life Insurance Policy Work?
So you’ve decided you no longer want or need your policy. The basic process for selling your policy involves assessing your options and considering the pros and cons of selling your policy to ensure you’re making the right decision.
Assessing Your Options
As you would with any major decision, especially one that involves a significant financial investment, you’ll want to consider the different options available to you. If your current policy isn’t aligned with what you actually need from such a policy, a life settlement provides an opportunity for getting back the market value of your policy.
While a life settlement isn’t the only option for converting a policy into cash, it’s certainly worth considering. If you’re looking to maximize value, selling your policy will be preferable to either lapsing a policy back to the insurance company (which comes with no payout) or surrendering the policy (which comes with a small payout) Generally, a life settlement will provide a payout anywhere from 4 to 7 times the size of the surrender value..
What Policies Are Eligible?
Most policies can be sold, even term policies as long as they are convertible to a permanent policy. There are three general requirements to qualify for a life settlement: the policyholder’s age, the policy’s death benefit (which typically needs to be around $100,000 or more), and the current medical conditions of the insured.
How Old Do I Have to Be to Sell My Life Insurance Policy?
Companies that buy life insurance policies consider many factors in assessing a settlement’s potential value—one of these factors is the policyholder’s age. The ideal client is a male or female in their mid-70’s or older that has had a change in health since the policy was issued. Term policies can be sold as long as they are convertible.
Can you sell your life insurance policy if you are under 65? An exception to the 65 years old guideline would be a male or female in their 60’s to early 70’s that has multiple chronic medical conditions, and a significant health change has taken place since the policy was issued. For an insured to qualify, their life expectancy must be 15 years or less.
The Pros and Cons of Selling a Life Insurance Policy
There are clear pros and cons to selling a life insurance policy for cash. The biggest of these center around the amount of the payout and potential tax consequences.
Pros: A Lump Sum
If you don’t want or need your policy anymore, a life settlement offers a reliable way to get some value out of the investment you’ve made (through premiums paid, etc.), more so than surrendering your policy. You can expect a lump sum that is less than the policy’s death benefit, but more than the policy’s cash value. A rule of thumb is that the shorter the life expectancy, the larger the settlement.
Cons: Lower Payout, Applicable Taxes
Assuming you qualify for a settlement, one of the cons is that you won’t receive a payout as substantial as the death benefit would be. This may or may not matter, but if you have one or more beneficiaries, then the decision will impact them.
Many people ask, “Do I have to pay taxes if I sell my life insurance policy?” And the answer is maybe. How much of the cash value of a life insurance is taxable depends on the following conditions:
- If you sell your policy and the settlement amount is less than the amount of total premiums paid (your basis) no tax will be due.
- If you sell your policy for more than your basis you will pay a long term capital gain on the amount above your basis.
Capital Gains Tax
Another important consideration for those thinking about selling a life insurance policy for a cash settlement is the impact of capital gains tax. So, what is a capital gains tax, exactly?
Capital gains are the profits from the sale of an asset (life insurance is considered an asset), meaning that the profit you make from selling your life insurance policy would be taxed. How much you are taxed depends on how long you hold onto this asset. There are two main types of capital gains tax, short-term and long-term.
- Short-term capital gains tax is a tax on profits from the sale of an asset held for one year or less (this is equal to your personal income tax rate).
- Long-term capital gains tax is a tax on profits from the sale of an asset held for more than a year (this tax rate is 0%, 15%, or 20%, depending on your taxable income and filing status).
While deciding on whether or not to cash in your life insurance policy, it would be helpful to figure out how to maximize the amount of money you will receive in return. The tax consequences of cashing in a life insurance policy can result in a smaller return. For example, if you are under the age of 59½ there is a possibility you will be hit with a 10% or more early withdrawal penalty. Working with an advisor is a great way to make sense of everything, to ensure you make the right choice for you.
How Much Can I Get for Selling My Life Insurance Policy?
There is no universal, easy answer to the question of how much cash you can expect to sell your life insurance policy for, especially if you’re not too familiar with the ins and outs of how policies accrue cash value over time. The policyholder’s age and health, as well as policy details like type and size, premium costs, and even who issued the policy, also impact the value. Read more about how much you can get when you sell your life insurance policy.
Let Us Help You Navigate Your Options
While we’ve attempted to offer some quick answers to common questions, we expect you to have a few more. If you’re still wondering, “Is it worth it to sell a life insurance policy?”, that’s what we’re here for—to understand your unique situation and find the best solution for you. Life Settlement Advisors want to help you understand if you qualify, and then we can talk through your options—the pros and cons of each, as well as what outcomes you can expect. .
Did you know you can sell all or a portion of a life insurance policy, even term insurance? Selling an unwanted life insurance policy is no different than selling your car, home or any other valuable asset that will create immediate cash. Contact us today to learn more.
Get in touch with Life Settlement Advisors today to take the first step toward converting your policy into cash.
Leo LaGrotte
Life Settlement Advisors
llagrotte@lsa-llc.com
1-888-849-0887
