A life insurance buyout is a process where the policyholder sells their life insurance policy to a third party for a lump sum of cash. The buyer then becomes the new policy owner and is responsible for paying future premiums. The life insurance buyout process typically occurs when the policyholder no longer needs the coverage or would prefer to receive money by cashing in their life insurance policy now
Before deciding if this is the right option, you should know a few things about life insurance buyouts. Below we will discuss the process of a life insurance buyout and answer some common questions people have about them.
What is a Life Insurance Buyout?
A life insurance buyout is a way for the policyholder to cash in on their life insurance policy. In exchange for the policy, life settlement companies will give the policyholder a lump sum of money, typically higher than the cash surrender value but less than the full death benefit.
This can be a good option for people who need money to cover unexpected expenses or no longer want to keep their life insurance policy.
It should be noted, however, that cashing in on a life insurance policy will typically result in a loss of coverage. It is important to weigh the pros and cons of a life insurance buyout before deciding. Before considering a buy out insurance policy option, there are some ideas to consider.
How Much Do You Get if You Sell Your Life Insurance Policy?
When it comes to selling your policy, you have two options:
Surrender Policy to Policy Carrier
If you surrender your policy to the insurance carrier, you will only receive the cash surrender value. This is typically a small percentage of what you have paid into the policy.
Sell Your Policy to a Life Settlement Company
If you sell your policy to a life settlement company, you will receive a lump sum of cash. The amount you receive will depend on several factors, such as the type of policy, death benefit, health of the insured, and more.
If you are a Federal Employee and have been looking for a way to sell your Federal Employee Group Life Insurance policy, or FEGLI policy, check out our blog post How to Sell a Federal Employee Group Life Insurance Policy.
What Buyers Look For
When looking for a life insurance buyer, these companies will consider a few factors when determining your policy’s worth.
The first is the type of policy you have. Term Life insurance policies are measured against the insured’s life expectancy to determine if they are expected to outlive that term. For policies issued through employers, buyers must determine if the policy has been converted to an individual policy, allowing them to purchase it. They will also look at the specific details such as projected premiums, any riders on the policy, cash value, and whether any premium waivers exist. There are other types of insurance available such as universal life insurance and whole life insurance.
Another factor that buyers look for is the death benefit. The higher the death benefit, the more valuable the policy will be to the buyer.
Buyers will consider the policy’s premiums over the cash value. If the premiums are too high, it will be difficult to profit from the policy.
How Selling a Life Insurance Policy Works
If you are interested in selling your life insurance policy, there are a few things you need to know about the process.
First, you will need to find a buyer for your policy. There are a few different ways to do this, but the most common is to contact a life settlement company. These companies buy life insurance policies from people who no longer want or need them.
Once you have found a buyer, you will need to discuss what your policy is worth. The price you receive for your policy will be based on the mentioned factors, including the type of policy, the death benefit, and the policy premiums.
Once a price has been agreed upon, the buyer will pay you the lump sum of money and take ownership of the policy. It is important to keep in mind that once you have sold your policy, you will no longer have life insurance coverage through that specific policy.
Potential Pitfalls
Before selling your life insurance policy, you should know a few pitfalls.
You will no longer have life insurance coverage through the policy you sell once it’s sold. If you die after selling your policy, your beneficiaries will not receive any money from that policy. However, you can always apply for a new policy. If you have additional policies, those will still be in effect and provide coverage.
You will not receive as much money from the sale of your policy as you would if you kept it until you died. This is because the buyer will be responsible for paying the premiums on the policy, and they factor this in when providing an offer for a policy.
Understanding Viatical Settlements
In selling life insurance policies for quick cash, a special option is a viatical settlement, especially designed for people with serious illnesses. Here’s how it works: someone facing a life-threatening illness, called the “viator,” can sell their life insurance policy to a company like American Life Fund for a lump sum. This company becomes the new policy owner and receives the death benefit when the viator passes.
A viatical settlement differs from regular life insurance buyouts because it focuses on helping people with health challenges. This option provides immediate money for those dealing with a serious illness. The money from the sale can be crucial for covering medical expenses and improving the person’s quality of life during tough times.
So, why would someone consider a viatical settlement? First, it offers financial help when dealing with health problems, covering important medical costs. Second, it provides quick access to money, addressing urgent needs without the delays of regular policy surrender or waiting for the policy’s death benefit. Lastly, choosing a viatical settlement gives the person control over their finances during a difficult period.
Companies like American Life Fund specialize in making viatical settlements smoother. They guide the person selling the policy ensuring it’s a smooth and hassle-free process for their clients. These companies have experience dealing with the unique challenges of viatical settlements and provide support and personalized solutions for those facing serious health issues.
Should You Pursue a Life Insurance Buyout?
Whether or not you should pursue a life insurance buyout is a decision you will need to make based on your circumstances.
If you no longer want or need life insurance coverage, then selling your policy may be a good option. Or it may be a good option if you have a life-threatening illness and need money to pay for medical expenses such as consultations or medical exams. In that case, a life insurance buyout may be the best way to get the money you need.
For some people, the benefits outweigh the negatives since they prefer to have the money now rather than later. However, keep in mind that you will no longer have coverage from the policy once you sell your policy.
Conclusion
A life insurance buyout can be a good option for people who need a lump sum of cash and no longer want or need life insurance coverage. However, it is important to consider the potential pitfalls of such a decision before proceeding.
If you have any questions about whether or not a life insurance buyout is right for you, please get in touch with us at American Life Fund for a free estimate of your policy!
Frequently Asked Questions
What life insurance policies can be sold in a buyout?
Life insurance buyouts are commonly associated with various policies, including term life insurance, universal life insurance, and whole life insurance. The type of policy can impact its value in a buyout.
Can I sell a permanent life insurance policy in a life insurance buyout?
Yes, permanent life insurance policies, such as whole or universal life, can be sold in a life insurance buyout. Factors like the death benefit, cash value, and other policy specifics will influence the value.
How does the cash surrender value differ from the amount received in a life insurance buyout?
The cash surrender value represents the amount a policyholder receives upon surrendering their policy to the insurance carrier. In a life insurance buyout, the policyholder typically receives a lump sum of cash from a life settlement company, often much higher than the cash surrender value but less than the full death benefit.
What are life settlement companies, and how do they determine the value of a policy?
Life settlement companies purchase life insurance policies from individuals. The value they offer is determined by factors such as the type of policy, the insured’s health, death benefit, policy premiums, and other policy details. They assess the policy’s worth based on these considerations.
Will selling my life insurance policy affect my coverage of other policies?
No, selling one life insurance policy in a buyout will not impact the coverage of other policies you may have. The impact is specific to the policy sold in the buyout.
Is pursuing a life insurance buyout the same as surrendering a policy to the carrier?
No, these are distinct processes. Surrendering a policy to the carrier means giving it up in exchange for the cash surrender value. In a life insurance buyout, the policyholder sells the policy to a third party, usually a life settlement company, for a lump sum of cash.
What should I consider before pursuing a life insurance buyout?
Before deciding on a life insurance buyout, weigh the pros and cons. Consider factors like the need for immediate cash, the impact on coverage, and potential financial implications. Consulting with professionals can help you make an informed decision based on your circumstances.
