( 3 minute read)
If you have a life insurance policy you no longer want or need, you might be interested in a life settlement. This transaction involves selling a life insurance policy in exchange for a cash sum. Most policy types are eligible, aside from term life insurance policies that don’t have a convertibility option.
Now you’re probably wondering, “is it a good idea to sell my life insurance policy?” And not only is that exactly what you should be asking, it’s what we’re here to answer.
There are really two main questions to answer: the reasons someone might consider selling their life insurance policy and the amount they might gain by doing so. By understanding and balancing these two factors, you can better understand the pros and cons of selling a life insurance policy in a life settlement—and whether it’s right for you.
Why Are People Selling Their Life Insurance Policies?
When someone no longer wants or needs their policy (or can’t keep up with its premiums), selling their policy in a life settlement is one of three main options, along with surrendering the policy or simply letting it lapse.
For many policyholders, life settlement brokers—third parties that facilitate the life settlement process, including finding a buyer—represent the best option. Life settlements routinely pay between 4 and 7 times what a policyholder would receive by surrendering their policy or letting it lapse.
How Does a Life Settlement Work?
It’s actually pretty simple. In a life settlement, a policyholder enters into a contract with a life settlement company. A life settlement enables someone to sell their unwanted policy to a third party. In doing so, they’re off the hook for paying future premiums. The company that purchased the policy takes over paying the premiums. Both parties ultimately benefit, since:
- The policyholder receives a cash payment worth around 20% of the policy’s cash value, and
- The company that bought the policy receives the policy’s death benefit when the insured passes.
When Is Selling Your Life Insurance Policy a Good Idea?
For most people considering a life settlement, it’s more than just a financial transaction. In many cases, they sell their policy in order to reduce expenses, increase their cash on hand, or a balance of the two. In other words, it’s often pursued either in response to a lifestyle change or to enable one.
Maybe their circumstances—or those of their dependents or beneficiaries—have changed. Or perhaps they decide their investment would be better spent on making memories (traveling, seeing family, etc.) rather than banking money toward their policy. Others opt for a life settlement when their own health changes, in which case they might cash out their policy in order to pay for healthcare expenses.
Whatever the motivation, it’s always important to discuss these decisions with a financial advisor, to ensure that you understand all of your options.
At What Age Can You Sell Your Life Insurance Policy?
A majority of the time, a life settlement requires that a policyholder be at least 65 years old, though that’s not the only eligibility requirement.
How Much Do You Get If You Sell a $100,000 Life Insurance Policy?
Before you decide to sell [your] life insurance policy for cash there is one more all-important, inevitable question: “How much can I sell my life insurance policy for?” As we mentioned previously, the value of a life settlement might be anywhere from four to seven times as much as your policy’s cash value.
Let’s say you have a policy that’s worth exactly $100,000. A life settlement would typically yield you around 20% of the policy’s value, meaning you’d walk away with around $20,000. That 20% figure is just an average, though: a life settlement may be worth anywhere between 10-25% ($10,000-$25,000) in actuality.
Make the Right Decision—for You—with LSA
Choosing to sell [a] life insurance policy for cash isn’t a decision you should rush into, but it also doesn’t have to be overwhelmingly complicated. In fact, in less than a minute you can see if you qualify.
Of course, not all companies that buy life insurance policies are the same—and they won’t all necessarily get you the best possible result. At LSA, we’ll put your needs first. We’ll listen to you, help you evaluate whether it’s the right decision for you, and guide you through the process. Reach out today to start the conversation!
