Whatever the reason you’re thinking of giving up your life insurance policy, you can do something better than just canceling it—you can sell it!
Everything You Need To Know About Selling Your Life Insurance Policy
How Selling Life Insurance Policies Work?
The Two Main Ways You Can Sell Life Insurance Policies
Pros & Cons of Selling A Life Insurance Policy
Selling Your Policy, is it Worth it?
Alternatives to Selling Your Life Insurance Policy
FAQ About Selling Your Life Insurance Policy
How Does Selling A Life Insurance Policy Work?
A life insurance policy is an asset that you own; as a policyholder, you can choose to sell your life insurance policy for a payout.
In general, there are two main ways of selling your life insurance policy: Life Settlement and Viatical Settlement.
While there is some overlap between these two options, there are also some key differences, which we will detail below.
The Two Main Ways You Can Sell Your Policy
One might choose to sell their life insurance policy if they have a financial emergency, need more money for retirement, or if they simply don’t want to keep up the premiums.
With both life settlements and viatical settlements, you sell your existing insurance policy to a third-party buyer in exchange for a lump-sum cash payment. The buyer then takes over the responsibility of paying the premiums on the policy. In return, they become the new beneficiary of the policy’s death benefit and will collect it upon your passing.
Selling Your Policy Through A Life Settlement
In general, a life settlement are for healthy seniors looking to cash out on their life insurance policies now. There are certain eligibility requirements when it comes to life settlements, including: policy age, policy minimum, etc.
The payout for a life settlement is typically more than the cash surrender value of the policy, but less than the death benefit. The exact figures will depend on your broker and the buyer. However, it is also worth noting with a life settlement you will have to pay taxes, this is because they are considered income. This is not true of viatical settlements, as you’ll learn in the next section.
Selling Your Policy Through A Viatical Settlement
Unlike life settlements, viatical settlements are designed specifically for life insurance policyholders who have a life-threatening illness, reduced life expectancy, or chronic health issues. Like with life settlements, there are certain additional eligibility requirements.
If you qualify for a viatical settlement, you can work with a viatical settlement broker to fill out a brief application that details some basic personal information, including your medical records, diagnosis, and stage of illness. Typically, your application can be processed in just a few business days, and you’ll be able to come to a written agreement regarding how big of a lump-sum cash payout you can expect.
Will I Qualify To Sell My Life Insurance Policy?
If you have been diagnosed with a life-threatening illness and are looking to sell your life insurance policy, we at American Life Fund may be able to help.
If you have held your policy for 2 years or more and your policy has a face-value minimum of $100,000, there’s a good chance you may be able to cash in your life insurance policy for a generous viatical settlement.
When you agree to sell your life insurance policy to life settlement companies like American Life Fund, you become the viator (seller) of your policy and the life settlement company becomes the buyer.
Once you’ve reached out to a life settlement company with your intent to sell your policy, you’ll go through a verification process, review your offer, and complete the necessary paperwork.
As the viator (seller) of your policy, you will receive a lump-sum cash settlement that is valued at more than the life insurance policy, but less than the death benefit amount. Once you receive your payout, the funds are tax-free and non-regulated, so deciding how to spend your money is completely up to you! In other words, you can use the funds in whatever way YOU see fit!
The broker who has purchased your life insurance policy will then take over by paying the monthly policy premiums, and will eventually be entitled to the death benefit after the viator’s (sellers) passing.
How Much Can I Get From Selling My Life Insurance Policy?
While the amount you will receive from selling your life insurance will vary depending on a few factors, including your specific policy and its amount, a general rule of thumb is that most people end up receiving 50-70% of the policy’s face value through their viatical settlement.
What Can I Use The Money For?
The wonderful thing about choosing to sell your life insurance policy through a viatical settlement is the financial freedom it provides you.
Once your life insurance policy has been sold, and you receive your lump-sum cash payout via a viatical settlement, there are no restrictions on how you can spend your money! And while perhaps you’d like to put some of your money towards medical expenses, you also have the option of putting it towards dream vacations, living expenses, early retirement–the list goes on and on!
Selling Your Life Insurance Policy Pros & Cons
Arguably the best thing about viatical settlements is that they can be used for anything of your choosing—there are absolutely no limitations!
Other pros of selling your life insurance policy through a viatical settlement include:
The process is straightforward and you’ll receive your funds quickly, usually in a matter of only a few weeks.
Monthly premiums will become a thing of the past; paying them becomes the responsibility of the company purchasing your policy.
The cash payouts are tax-free and non-regulated.
You’ll receive more money than if you were to simply surrender your policy for its cash value.
You have the option to use the funds for medical costs, including treatments, care, and quality of life benefits, but the funds can ultimately be used however you’d like.
You’ll have access to funds NOW—meaning, both you and your family have the option of enjoying the funds together.
Peace of mind! By alleviating financial stress, you can focus on the things that truly matter.
When making any major financial decision, it is important to consider all potential aspects. That said, let’s continue to weigh the pros and cons to determine if a viatical settlement is the right choice for you.
Some potential drawbacks of a viatical settlement include the fact that your beneficiaries will no longer receive the face value of your life insurance policy as a death benefit when you pass away. Additionally, if you have any creditors, they could make claims on your viatical settlement payout amount, so be sure to take care of any outstanding debts beforehand. Also, if you rely on any form of public assistance, such as Food Stamps, Medicaid, etc., your viatical settlement could make you ineligible for these programs.
Is Selling Your Policy Worth It?
Depending on your needs, selling your life insurance policy through a viatical settlement can definitely be a worthwhile choice. A huge benefit of viatical settlements over life settlements or other cash-out options, is that the money from a viatical settlement contract is all tax-free.
When a policyholder sells to a life settlement company (instead of a viatical), they have to pay income tax, or even estate tax, on the money. Viatical settlements are free from federal income tax and other fees, so sellers receive the full offer for their policy, regardless of the type.
A viatical settlement can be a great answer for seriously ill policyholders looking to cash out now and enjoy the financial freedom they would not otherwise be entitled to if they were to keep their standard life insurance policies in place without selling. Cashing out now could mean an early retirement, time off, more time with family, the option for travel, or whatever else you desire. Once you’re ready, you can use a viatical settlement to improve your situation in any way you want.
In addition to the option to sell your life insurance policy through a life settlement or a viatical settlement, there are other options. Let’s go over some of them.
Accelerated Death Benefit
An Accelerated Death Benefit (ADB) occurs when a life insurance policyholder receives a certain amount of their initial death benefit while they are still living. Another name for ADB is “living benefits”. ADB are usually specifically reserved for those suffering from a terminal illness and who have a life expectancy that is less than 2 years.
Once the amount is paid out to the policyholder, the policyholder must continue to make their monthly premium payments for the life of the settlement. It is important to note that the amount which is taken from the overall policy and given to the holder, is deducted from the overall face-value of the policy. Meaning, when the policyholder passes, the death benefit will be less.
A smaller death benefit isn’t practical for certain people and their families, making ADB a poor choice for some.
Borrow Against Your Policy
Borrowing against your policy is a short-term solution, which allows you access to “loaned” funds from your overall life insurance policy. It’s important to understand that these funds must indeed be paid back over time. There is also interest that accrues on top of the loan amount that must be paid.
Basically, surrendering your life insurance policy means you’re giving it up. More specifically, you agree to settle for the cash surrender value, which is less than the face-value of the policy. By agreeing to surrender your policy in exchange for the cash surrender value, you’re no longer entitled to the death benefit.
When you agree to surrender your policy, a certain amount is indeed taxable. It’s also important to remember that if you haven’t had your policy for all that long, it likely will not be worth as much as an older policy you’ve had for quite some time—this is because younger policies are usually subject to surrender fees. These are elements that discourage some from the option of surrendering their policy.
Let Your Policy Lapse
If you decide to stop paying your monthly premiums on your life insurance policy, it will lapse–meaning, it will no longer be active. Once your policy becomes inactive, you lose all benefits that come with it, namely, the death benefit.
Policyholders who let their policy lapse usually do so either because they are no longer able to afford the cost of their monthly premiums, they feel they no longer need life insurance coverage, or they no longer need the death benefit.
Sometimes reinstating your policy is possible, but not always. You are also not refunded for any of the money you invested into the policy through your monthly premiums.
Ask To Lower Your Coverage Amount
If you’re struggling to afford the cost of monthly premiums on your life insurance policy, but do not want to let it lapse, lowering your coverage amount may be possible, but it depends.
Lowering your coverage amount is usually only possible for policyholders who have a permanent life insurance policy, and not those who have a term life insurance policy.
If the company is willing to lower your monthly payment, it will come at the cost of lowering your policy’s overall face value. In doing so, your death benefit amount is reduced.
There may be other ways to lower your coverage amount, but it depends on a lot of different factors, such as: the type and life of your policy, its cash value, dividends (if applicable), etc.
A 1035 Exchange occurs when you transfer the funds from one life insurance policy to another one.
If you’re hoping to transfer your life insurance policy funds from one policy to another, it’s important that you specifically utilize the 1035 Exchange process, or you risk paying income taxes on any gains from the original life insurance policy.
The decision to switch funds from one policy to another is at the discretion of the policy holder, and may or may not be an appropriate decision for your unique situation and needs.
Frequently Asked Questions About Selling Your Life Insurance Policy?
Can you sell your insurance policy?
Because your life insurance policy is an asset that you own, you can absolutely sell it to a company through a viatical settlement.
How much can I earn from selling my life insurance policy?
Usually, 50-70% of the policy’s face value is paid in a viatical settlement. And remember, unlike life settlements, viatical settlements are tax-free—meaning you’re likely to receive a higher payout, since your money is not being taxed as income.
Is it worth it to sell your life insurance policy?
For many people, the financial freedom you can receive makes selling your life insurance policy a very worthwhile choice.
How much can you sell a $100,000 life insurance policy for?
Because viatical settlements typically pay 50-70% of the policy’s face value, if you were to cash in a $100,000 life insurance policy, you’d be looking at receiving anywhere from $50,000-$70,000 in the next few weeks.
Should I sell my life insurance policy?
If you’re looking to have access to cash benefits now, selling your life insurance policy through a viatical settlement may be the best option for you.
Disclaimer: American Life Fund is not a licensed provider and may not be licensed in your state. Principles hold brokers license in various states nationwide. Due to life settlement regulations varying state by state, our services are not available to residents in all states, including Georgia and Florida. The content contained in this website is not applicable for consumers in states where American Life Fund is not permitted to make life settlement transactions, solicit or advertise. Any offer is conditional, contingent upon written terms and conditions, and is non‐binding, as well as subject to due diligence and execution of closing documents.