6 Reasons Why People Sell a Life Insurance Policy

August 15, 2023 | By Adam Lippman

6 Reasons Why People Sell a Life Insurance Policy

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Why would you sell your life insurance policy? Whether you have heard of others selling their life insurance or are interested in doing so, you may wonder what the purpose of selling a life insurance policy is. The process of selling your life insurance is called a Life Settlement. These cash settlements can result in significant payouts that you can use to pay your bills or enjoy retirement. The reasons why people sell a life insurance policy vary significantly depending on factors like their financial situation or health.

Learn more about Life Settlements and why you might want to sell your life insurance policy. 

Why Would Someone Sell Their Life Insurance Policy?

The short answer is that people sell their life insurance policies for numerous reasons, most of which can be narrowed down to changes in circumstances or financial needs. Selling your life insurance policy to a third party is called a Life Settlement. Life Settlements sell for more than your policy’s cash surrender value and less than its death benefit. With the potential for higher profits from a Life Settlement, a policy owner may sell their life insurance for many reasons.

Selling your life insurance policy to a third party is called a Life Settlement. Life Settlements sell for more than your policy's cash surrender value and less than its death benefit.

1. Retirement Funds

Many policy owners sell their life insurance to have extra retirement funds. Whether using the profit for bucket list items or to supplement a fixed income, retirement funds can serve several purposes. For example, some policy owners could not save enough for retirement and may be stretched thin, so a Life Settlement helps them make ends meet. Others may seek a Life Settlement to travel or purchase new toys like an RV or boat. 

Regardless of the need or want for retirement funds, a Life Settlement can help make life more comfortable.

2. High Premiums

Another common reason policy owners sell their life insurance is to get relief from high monthly premiums. Many policy owners struggle to make premium payments, especially when prices rise, while others may see no need to keep paying for the policy. High premiums can be a significant burden, especially when circumstances change and you no longer need the coverage. In such situations, it is common for people to let their policies lapse, which does them no good.

Instead, a Life Settlement allows you to get out of your policy, end your premium payments, and get some cash from the sale.

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3. Cover Medical Expenses

As they age, it is more common for policy owners to have increased medical needs and healthcare visits. Expenses like hospital stays, prescriptions, and hospice care can add up quickly and become more than most can afford. Some policy owners may sell their life insurance to cover healthcare-related expenses. This is much more common for terminally ill policy owners seeking Viatical Settlements. Viatical Settlements allow these individuals to support themselves when they cannot work, fund long-term care, and otherwise cover any medical expenses.

4. Tax Benefits

Many people choose to sell their life insurance now because the updated tax laws have made Life Settlements a more favorable option. In the past, Life Settlements were taxed more than a policy surrender, which made them less desirable. However, the Tax Cuts and Jobs Act (TCJA) reduced Life Settlement tax rates, so now they are the same as surrendering a policy. This is beneficial because policy owners can get more value for their policies in a Life Settlement without paying higher taxes.

Life insurance policy owners may choose to sell their policies to take advantage of these newer Life Settlement tax laws. 

5. Exit From a Company

Some people get life insurance policies through their employer, especially those in executive or top-level positions or riskier industries. Often, these policies are only valid while the policy owner is employed with the company. When they leave the company, the policy owner may no longer need the insurance and could choose to sell it.

For example, employees at a mining company may have life insurance through the company designed to provide for their families while they work in that dangerous position. If they leave the company, the policy may no longer serve its intended purpose and could be worth selling.

6. Term Policy Is Nearing the End of Coverage

Term life insurance policy owners may sell their policies as their coverage period nears its end. In most cases, when a term life policy ends, it simply expires ‚ÄĒ the owner no longer pays premiums, and there is no potential death benefit. This situation is often called outliving your assets, which means your policy ends before the death benefit is issued.¬†

Rather than letting the policy expire and getting no use out of it, the policy owner could sell it to get some of their money back. They could then purchase a new policy or go without coverage. 

Alternatives to Selling Your Life Insurance Policy

Whether you are looking for cash or a way out of your policy, you have alternative options to a Life Settlement. While selling your life insurance policy will likely get you the most money, knowing your other options can help you decide what is best for you. Here are some other ways you could get cash for your life insurance policy or get out of the policy:

  • Surrendering the policy:¬†While surrendering your policy will not result in a big payout, it can be an option for quick cash. Surrendering your life insurance lets you access the cash value and ends the policy coverage, so you will not have any more premiums.
  • Accelerating the term:¬†With some policies, you may have the option to accelerate the term, which involves claiming the death benefit while you can still use it. This option depends on your insurance provider and the terms of your policy.¬†
  • Take out a personal loan:¬†If you are in a tough financial situation and still want to maintain your life insurance coverage, you may opt to take out a personal loan to pay the premiums. These funds could help cover your expenses, but you will have to pay interest on the loan.
  • Replace your policy:¬†You may be unsatisfied with your current policy but still want to maintain coverage. In this case, you could look for new life insurance to replace the existing one. You may find a new policy with better coverage or lower premiums.
  • Withdraw cash value:¬†Some insurers allow policy owners to access their policy’s cash value in life. While withdrawing cash value will reduce the death benefit, it may be an option for quick access to cash.

While selling your life insurance policy will likely get you the most money, knowing your other options can help you decide what is best for you.

The best way to decide what to do with your life insurance policy is to speak with an insurance or financial advisor. Every policy and situation is different, so some options may suit your needs better than others.

Should You Sell Your Life Insurance?

Selling your life insurance policy is not the right solution for everyone. A Life Settlement is a big decision and should be carefully considered. So, how do you determine if a Life Settlement is the right financial move for you? If any of the above situations apply to you, a Life Settlement could be a good option for you. However, you should still carefully consider your unique situation.

Life insurance aims to ensure your loved ones are financially cared for if you pass away. You may choose to sell your policy if your circumstances have changed since you originally purchased the policy. For example, if your children have grown up and gotten their own policies, you may not need your life insurance anymore since they don’t rely on you financially.¬†

Conversely, many people have started using life insurance policies to diversify their investment portfolios. While life insurance policies can be a beneficial asset, that is not what they were intended for. As such, you may be better off selling your life insurance policy and putting the funds toward another investment vehicle. 

You may also want to consider whether you are eligible for a Life Settlement. Often, you must be over the age of 65 with a policy death benefit worth $100,000 or more. Selling some policies is not allowed, so be sure to check with your provider. It is best to consult with a financial advisor and settlement broker when deciding whether to sell your life insurance policy.

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How Much Can You Get for Selling Your Life Insurance?

The amount you can get for selling your life insurance varies from case to case. Several factors can affect the payout, including:

  • The death benefit value:¬†Once your policy is sold, the buyer becomes the owner. They pay the premiums and receive the death benefit. As such, the death benefit amount affects how much buyers are willing to pay to purchase your policy. Plus, Life Settlements will not be more than the death benefit, so this also serves as a cap to what you could make in the sale.
  • Your age and health:¬†Age and health affect your Life Settlement sale because they imply how long the buyer would have to continue paying the premium. For example, shorter life expectancies yield higher policy values because the buyer is more likely to receive the death benefit sooner and will have to make fewer premium payments.
  • The premium amounts:¬†Similarly, the amount you pay in premiums will affect the settlement value since the buyer must continue making those payments. The premium amount impacts how big of a return the buyer will get after receiving the death benefit. The more they have to invest in premiums, the less return they get, so the lower your settlement amount will be.
  • Selling independently vs. through a broker:¬†Trying to sell your policy independently often yields lower settlement profits unless you have extensive industry knowledge. Working with a broker or settlement provider increases your chances of finding a high-paying buyer.¬†

In most cases, you will get significantly more in a Life Settlement than surrendering the policy to the insurance provider. Before making any decisions, talk to a Life Settlement expert to determine how much your policy could be worth.

Tips for Selling Your Life Insurance

The Life Settlement process can be confusing, especially if you are unfamiliar with how it works. Here are a few additional tips to help you prepare for selling your life insurance policy.

Tips for Selling Your Life Insurance

1. Do Your Research

Before you start, do some research and get to know the process so you understand what to expect. For example, regulations for selling life insurance vary between states, so you need to know what rules are in place where you live. While you can find lots of valuable information online about Life Settlements, it may be more beneficial to seek information from an industry professional so they can help you understand how a Life Settlement could work with your particular situation.

You should also know your policy type, coverage amount, and your policy’s cash value. Having this information ready helps you understand Life Settlement eligibility and get an accurate value estimate.

2. Be Aware of Potential Taxes

Because the IRS considers Life Settlements a sale of assets, the profits from the sale are subject to federal and state taxes. This aspect of Life Settlements is often overlooked and can surprise many policy owners. There are various rules and potential taxes, but generally, the total amount you paid in premiums on the policy is considered tax-free profit in the settlement, and the rest of the profits are taxed as ordinary income or capital gains.

State taxes on Life Settlements vary, which you will likely come across in your research of state-specific regulations. Life Settlement taxes are inevitable, but Viatical Settlements are tax-free. After your settlement, working with a tax advisor is the best way to determine how much you owe in taxes on the settlement.

3. Collect Paperwork and Medical Records

Potential buyers typically want to see copies of your life insurance policy and medical records. They will use this information to determine how much your policy could be worth and how much they want to offer you for it. Collecting the paperwork early can save time once you start the settlement process, especially because getting copies of some records can take a while.

4. Work With a Reputable Broker

Working with the right broker can make a significant difference in your Life Settlement profits and how smooth the process goes. Regardless of why you are selling your life insurance, the process may be difficult, and your Life Settlement broker should recognize that. A reputable broker puts your needs first to ensure you get the best deal for your policy. 

Evaluate Your Policy’s Value With Settlement Benefits Association

At Settlement Benefits, we are dedicated to helping you maximize your life insurance policy’s value. We represent you in the sale of your policy, working to find a buyer with the highest payout. We understand you may need money to support your loved ones, so we aim to be a comforting presence throughout the process. If you have more Life Settlement questions,¬†contact us¬†for help. Use¬†our visual valuator¬†to determine if you qualify for a Life Settlement.

Evaluate Your Policy's Value With Settlement Benefits Association

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