What You Really Need to Know About Selling Your Life Insurance Policy

If you’re like most life insurance policy owners, you will have to make monthly payments on your policy in order to keep it in force and collect the face amount when you die. But statistics show that only a very small percentage of policies ever pay out, as many policy owners will surrender their policies or let them lapse when they reach a point where the coverage is no longer needed.

However, there is now a much better alternative for many policy owners. A life settlement allows a policy owner to sell their life insurance policy to an investor (usually a life settlement company) and receive considerably more (as much as eight times more, in some cases) than they could get by just surrendering their policy or letting it lapse.

• The amount of money that you will receive for your policy will depend on the size of the death benefit and the amount of premium due each year. Your health and age are also factors, and the more likely you are to die soon, the more money you can get for your policy. This is because the life settlement company gets its money back from the policy’s death benefit, which you will sign over to them at the time of purchase. The sooner you die, the better the rate of return for the settlement company.
• The amount that you receive will always be less than the policy’s death benefit, but will also always be considerably more than the policy’s cash value. The average payout for a life settlement is generally equal to 20 to 30 percent of the policy’s death benefit. So if you sell a policy with a death benefit of $1 million, you could get $200-$300,000 for it in cash.

Once you have signed over your policy, the life settlement company becomes responsible for paying the premiums until you die. They also assume the risk that you may outlive your life expectancy. Life settlement companies represent the other side of the coin from life insurance companies, as the latter group wants you to live as long as possible and keep paying them premiums. Meanwhile, life settlement companies want you to die as soon as possible so that they can recoup their investment from the death benefit.

Most life settlement companies and brokers will only buy policies that have at least $100,000 in cash value with an owner who is at least 65 or 70 years old.

This is because sellers in this age range are likely to die sooner and thus increase the rate of return received by the settlement company. If you die ten years after selling your policy, then the rate of return received by the life settlement company will be much lower than it would be if you were to die only a year later. Most life settlement companies try not to pay premiums on the policies that they buy for more than 7 to 10 years, and they are also usually not interested in policies where the cash value is equal to at least 25 percent of the death benefit.

It should also be noted that selling your life insurance policy is a taxable transaction. You will owe ordinary income tax on any cash value you receive that exceeds the total amount of premiums you have paid into the policy. You will also owe capital gains tax on any amount that exceeds the cash value of the policy.

It is probably wise to consult a tax expert or financial advisor for guidance in this matter. And receiving a lump sum of cash from a life settlement can also propel you into a higher tax bracket.

Life settlements are viable options for policy owners in a variety of circumstances. The coverage may simply no longer be needed because the owner’s children have grown up and the owner’s spouse has adequate assets to pay for living expenses once the owner dies.

A business that owns key person life insurance may lose the employee to a competitor and thus eliminate the need for the policy. Trusts can own life policies that do not perform well and would be better sold for cash up front and then replaced. A life settlement can also be a good idea if funds are needed to pay for long-term care expenses.

Life settlements are not for everyone, but they do provide many policy owners with an excellent alternative to surrendering their policy or letting it lapse. Consult your financial advisor to find out more about these settlements and whether one is right for you.