Unlike other insurance policies, life insurance is of little use while the policyholder is alive. To many people, this might appear to be an unnecessary expense, especially if they realise that the policy is no longer as valuable as it once promised to be. Instead of waiting for years to cash out the policy, some people may prefer to liquidate their life insurance. This is often a source of quick cash in times of financial shortage, when the need for money surpasses the need to have life insurance.
If you are in need of money, selling your life insurance policy could be profitable. But it is not always easy. From getting your policy appraised for its current market value to choosing a buyer, the process of selling your life insurance is often fraught with complications. It becomes harder if you are under the age of 65 with good health, and if you only get a fraction of your policy’s worth (sometimes up to 50% lower than the actual value), it also fails to meet your monetary needs. Much like home or auto insurance, a life insurance policy is highly individual and the same does not work for everyone. But it is possible to successfully liquidate life insurance by being diligent about market research.
How to sell your life insurance policy
A life settlement is the more technical term for selling your life insurance policy for a one-time cash payment. Typically, investors are the ones who are looking for life insurance policies to purchase and add to their portfolio.
Investors who buy your policy on the secondary market are looking for sellers who are over age 65 and have limited life expectancies. The reason is that when you die, the buyer gets the death benefit of the policy.
Naturally, investors are the most interested in high-value policies. Contributing factors include the total value of the policy as well as the life insurance company issuer rating, where “A” or better is preferred. Investors may also be looking for universal life policies with low or flexible premiums so they pay as few premiums as possible. While your policy may still sell if you have another type of policy, the offers may be lower.
To actually sell your policy, you’ll need to find a broker or a life insurance settlement company. They will act as the middle man in the transaction, and find an interested buyer. Just keep in mind that brokers and settlement companies charge a fee, which means you won’t get the full value of the selling price.
Tips for selling your life insurance policy
Selling your life insurance policy isn’t easy. In fact, it can be difficult to find an investor that is willing to give you an acceptable offer. However, there are ways that you can maximize your payout. Here are five tips to keep in mind:
Get to know the process
Selling your life insurance policy is somewhat complicated, so before you get knee-deep in the process, it helps to have a solid understanding of how it works and what to expect. Make sure you know what type of policy you have, how much coverage you have and how much cash value is in the account. Also look into the rules and regulations for selling life insurance policies in your state.
Consider hiring an independent advisor
Find someone who is an expert in life insurance settlements and have them assess your policy’s value. Independent advisors can offer appraisals of what your life insurance policy is worth. They can also tell you about features that may add value, recommend brokers and help fill in the gaps.
Find a reputable broker
When trying to find the right broker, a good process is to interview not one but several. Ask questions like: What can you do to improve the offers I get? What is your commission structure? Is it negotiable? Are you licensed in your state? Are you willing to give discounts if I pay for medical expenses? Pay close attention to the transaction costs, because they can easily eat up your profits. Some experts indicate brokers can charge as much as 30% to 50% of the gross policy price, or as little as 5% to 15%.
Get multiple offers
Be prepared for your offers to vary widely. “People think one or two bids are the end all and be all,” says William Mountain, CEO of Institutional Life Settlement Advisors in Hollywood, Fla. “But this is a completely negotiated market. One offer gets doubled and tripled by another company.” It’s worth taking your time, and waiting for a good offer, keeping in mind the best offer might not be the first one.
Round up your paperwork
Your broker will provide potential buyers with a copy of your life insurance policy. However, buyers will also want to see your medical records in order to gauge the value of your policy. “We need a five-year medical history, including primary doctor and specialists,” says Mountain. He adds that these records can cost a few hundred dollars.
Why should I sell my life insurance policy?
If you need cash quickly, selling your life insurance policy may seem like a smart move. However, it is only a good option in certain situations.
If you can no longer afford to pay your life insurance premium, selling the policy might relieve the monthly payments and put some money back into your pocket. Life insurance settlements usually result in a larger payout than what you would get from cancelling or surrendering your policy.
It may also be worth selling your life insurance policy if you need to cover a sizable emergency cost. For instance, if you are diagnosed with a terminal illness and need to pay for treatment, you could sell your life insurance policy and use the cash for medical bills. Even with a terminal illness rider on your policy, depending on your circumstances, you might get more money by selling your policy.
Ultimately, selling your life insurance policy is typically considered a last resort option. If you need money to pay for medical expenses, a financial expert might recommend you first consider borrowing against your policy’s cash value. If your policy has an accelerated death benefit, you can claim the money while you are still living to help pay for treatment and palliative care. If you can no longer afford the premiums, you could give up your policy and take the surrender value.
Alternatives to selling your life insurance policy
A common reason for selling a life insurance policy may be the need for money. However, if quick money is what you need, then there are several alternatives to selling your life insurance, which are often easier and less complicated. Some options to consider before selling your life insurance policy are:
- Accelerating the term: Depending upon the type of policy and insurer, it may be possible to claim your life insurance money while you are still alive.
- Taking a loan against the policy’s cash value: Borrowing money against the total value of your life insurance policy comes with monthly interests and helps pay back the amount lent to you. Typically this is only possible if you have a permanent life insurance policy.
- Surrendering the policy: This may not result in a lot of money but surrendering your life insurance policy gives you access to some quick cash in the form of the surrender value.
- Taking a personal loan: If you are in a tight spot, getting a personal loan from your bank is an easier alternative in most cases. Although you have to pay an interest, the rates are usually cheaper than traditional payday loans.
Frequently asked questions
How much can I get for my life insurance policy?
It’s difficult to say how much money you can get for your life insurance policy. Payouts vary significantly, and are based on factors like your age, your health, the value of your policy, the amount of coverage you have, the financial performance of your insurance company and more.
How long does it take to sell a life insurance policy?
It will probably take at least a few months to sell your life insurance policy. However, the amount of time it takes depends on the number of offers you get and the quality of those offers. If you accept the first offer that comes in, it might only take a month. However, you might be waiting for several months to get a suitable offer, depending on the market.
How do I find a reputable broker?
You can do some research online to find a good broker. If you consult an independent advisor, they can also give you some recommendations. Before you hire a broker, find a few that have good reviews and set up a short interview with each. Ask about their experience, their process and, most importantly, their fees.