Sell My Life Insurance Policy for Cash
Sell My Life Insurance Policy for Cash
Most life insurance policies are considered assets under federal law, giving the owner the right to sell them.
Can I sell My Life Insurance Policy for Cash
Yes. You can sell your Life Insurance Policy.
Policyholders of permanent life insurance who can no longer afford to keep up the premiums or need money because they are ill or disabled may be able to surrender their policy to their insurance company and receive a cash payment.
However the amount they can receive is typically much less than if a third-party is willing to buy the policy, become the beneficiary and continue paying premiums until the policy holder dies.
How old should I be to sell my Life Insurance Policy
An individual who has a life insurance policy he believes he no longer needs may be able to sell the policy to investors that are interested in holding the policy as an investment and ultimately collecting the death benefit.
The investors pay all premiums due on the policy after their purchase.
Depending upon the age of the insured at the time of the sale, he may receive a significant percentage of the death benefit amount as the sales price.
You generally have to be over 65 years of age for a financial buyer to be interested and of course, the older you are, the more the buyer will pay because they will expect to collect the death benefit sooner.
Questions can help you determine whether the life settlement option is suitable for your situation:
- Can you continue to afford the premium payments on your policy?
- Are you considering “lapsing” or “surrendering” your policy for any reason?
- Have the investment options in your universal policy under-performed?
- Do you currently need the policy, or have you outlived the beneficiary?
- Has your estate plan changed?
- Do you need additional funds to assist with retirement expenses or other costs?
- Would you like to invest in other investments?
- Is there a family member or members you would like to assist financially before your death?
- Is the policy a “key man” policy no longer needed for business?
- Do you have debts you’d like to repay now?
How to sell your Life Insurance Policy for Cash
When you sell your policy, the purchaser becomes its owner and beneficiary and the policy remains in force.
The new owner maintains the premium payments until your death and collects the death benefit.
In the same way the insurance carrier did when you bought the policy, the purchaser will review your medical record to assess your current health status to estimate your life expectancy to determine a value for a policy.
All things being equal, the longer your life expectancy, the lower the value of your policy.
Income tax consequences of sale of life insurance policy
You may have to pay income and capital gains taxes. Be sure to talk to an accountant before making your decision.
Let’s look at an example under the current tax law as a way to illustrate how life settlements are taxed. Here is a summary of the facts:
- Cash surrender value of $78,000
- Total premiums paid of $64,000
- Cost of insurance of $10,000 (no longer applicable to the calculation since TCJA)
- The policy has been owned for 8 years, has had no withdrawals, and has had no loans
- The individual is not terminally or chronically ill
- The policy is sold for $80,000 in a life settlement transaction
Prior to TCJA, the cost basis as determined in IRS Ruling 2009-13 would have been the premiums paid reduced by the insurance company’s record of the internal cost-of-insurance charges ($64,000 – $10,000 = $54,000 in this example). However, TCJA repealed this interpretation, and instead the cost basis is simply the total premiums paid ($64,000).
To determine whether it would be better from an economic standpoint for the policy owner to sell or surrender the life insurance policy, the net proceeds that remain from a life settlement after taxes must be compared to the after-tax proceeds an individual would obtain from surrendering the policy.
Life Settlement Contract Process Snapshot
Here is a final, high level summary of the steps in the life settlement transaction:
- Decision— the financial advisor works with the client to evaluate the appropriateness of a life insurance settlement and considers all the alternatives. If the client agrees and wants to proceed, the advisor helps the client identify a trusted life settlement broker. Upon retaining a broker, the broker will evaluate the case and also make suggestions on whether to proceed with the transaction.
- Information gathering—the life settlement broker obtains information about the life insurance policy and the state of the insured’s health. The medical records of the insured are gathered. Then, the broker engages an independent life expectancy underwriter to estimate the life expectancy of insured.
- Application—an application for the sale of the life insurance policy is completed and sent to various life settlement companies to solicit offers for the policy.
- Review, Analysis and Offer—once they have all the data, the life settlement providers calculate the value of the life insurance policy and decide whether to make an offer to buy to the life insurance policy from the policy owner. If the life settlement provider’s analysis of the policy indicates that an offer should be made to buy it, the provider makes a formal life settlement contract offer.
- Receipt and Evaluation of Offers—the broker will present all received offers to the client and the advisor with an objective explanation of each offer and make sure that everyone understands them. The advisor and the client will usually have 30 days to consider the offers and if the client accepts an offer, the life settlement broker communicates the offer’s acceptance to the appropriate life settlement provider.
- Completion and return of closing package—the provider sends a life settlement contract “closing” package, containing the documents necessary to formalize the policy owner’s acceptance of the life settlement exchange offer and to request that the life insurance issuer transfer ownership of the policy to the life settlement provider. The life settlement broker makes sure the financial advisor and the client understand the forms before the client signs and returns them to the life settlement provider.
- Submission of the transfer-of-ownership forms and escrow of funds—when the life insurance provider receives the completed life settlement contract documents in the closing package, it makes a formal request to the life insurance company for the transfer of the policy’s ownership. At the same time, the funds to be paid for the life insurance policy are given to an escrow agent for safekeeping pending the actual transfer of the policy’s ownership to the life settlement provider.
- Acknowledgement of the transfer-of-ownership and release of the escrowed funds— when the transfer of the policy’s ownership is completed and recorded by the insurance company, the insurer sends confirmation to the client and the life settlement provider (the new policy owner). The confirmation is forwarded to the escrow agent, who then releases the funds in payment for the life insurance policy.
Before choosing to settle your life insurance policy remember to consult with your lawyer or a properly licensed financial institution. Make sure you’re aware of the confidentiality policies of everyone involved, get quotes to ensure you’re getting a fair price and make sure you understand the tax implications of your life settlement.
Selling your policy might seem like a complicated undertaking. It is part of your financial portfolio, after all.
Contact us at 813-964-7100 to schedule a meeting to review your options.
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