At What Age Can You Sell Your Life Insurance Policy?
To make informed decisions about selling a life insurance policy, it’s crucial to understand the eligibility criteria, process, and implications. This guide will help you navigate the intricacies of life settlements, ensuring you have all the information needed when considering selling your policy. One of the first questions people often wonder is: at what age can you sell your life insurance policy?
As you near retirement, life insurance policies can become more about financial strategy than protection. So when, exactly, is the right time to sell? While a life settlement depends on various factors, most providers suggest individuals be at least 65 years old. Depending on the insured’s health status, though, some providers may provide an offer to folks who are younger than 65 years old. While age is just one of several eligibility factors that play a role in life settlements, this guide will help you navigate life settlement requirements, the process, and the implications to ensure you are well-informed before selling your life insurance policy.
Key Takeaways
- What is the minimum age requirement? Most life settlement providers require the insured to be at least 65 to proceed with a life settlement. However, this qualification has a few exceptions based on other eligibility factors.
- What financial impacts are there when selling a life insurance policy? It’s important to understand how life settlement payouts are taxed and how they can temporarily affect your eligibility for government programs such as Medicaid.
- Are there state regulations for life settlements? Different states have laws around life settlements. The rules that providers must follow in each state where a transaction occurs are important to inform you about the life settlement laws in your state before selling your policy. Make sure you work with a provider who is licensed in your state.
Eligibility Criteria to Sell a Life Insurance Policy
Before you begin selling your life insurance policy, you should be aware of the eligibility requirements. Many buyers qualify individuals 65 and older to receive an offer, but other factors, such as your health status, influence the decision. If you’re wondering at what age can you sell your life insurance policy, age 65 is a common benchmark—but exceptions do exist. Wondering if you qualify? Here are the eligibility requirements:
Age Requirements
While age requirements among life settlement providers vary, most generally require the insured to be 65 years or older. Some exceptions are made for younger individuals with certain health conditions, such as a terminal or chronic illness, which are dealt with on a case-to-case basis.
Health Considerations
Your health status can significantly affect your eligibility for a life settlement. For example, a decline in health from the time your policy was issued can help improve your chances of qualifying, but it isn’t required.
If you’re younger than 65 but have a terminal illness, you could qualify for a life or viatical settlement due to your shorter life expectancy. In fact, many people in this situation ask, can you sell your life insurance policy if you are under 65? The answer is yes, especially if your health condition reduces your expected lifespan. Alternatively, if you’re in perfect health, it may be harder to get an offer from a provider because of your longer life expectancy.
Other Eligibility Factors
Age and health are two essential eligibility factors for a life settlement. Still, there are other qualifications that are just as important, including (but not limited to): policy size, cost of premiums, and policy type.
The size of your policy matters: typically, policies with a death benefit over $100,000 are more enticing to potential buyers. While a policy with a death benefit below $100,000 can qualify, there is no guarantee that it can be sold.
In addition to age, health, and policy size, providers will evaluate the type of policy you have and how premium payments are structured. Permanent and convertible term policies generally have higher premiums than term policies, but are more commonly sold because providers can keep the policy active until the insured’s death without worrying about the end of a term period. Term policies qualify less often than permanent life insurance policies for a life settlement, but can qualify to be sold under certain circumstances. Since policy structures vary so much, life insurance buyers will do their due diligence to evaluate the terms and conditions of your policy before calculating a fair offer.
The Process of Selling a Life Insurance Policy
Understanding the steps to selling your life insurance policy is crucial to knowing what to expect from the process and how long it could take to sell it successfully.
Understanding Your Policy Details
Before beginning the life settlement process, be sure to review your policy details. This ensures that once you start, you will know who owns the policy, who is insured, what the death benefit amount is, and what type of policy you have. Knowing additional features, such as riders and beneficiaries, could also streamline the process so that you can get your cash payout more efficiently.
Checking State Regulations
Each state determines the regulations around who can sell a life insurance policy, how the sale should be handled, and how consumers are protected. Some states require specific disclosures that life settlement providers must include so that policyowners fully understand the process. Before proceeding with a life settlement, you should:
- Find out your state’s regulations by visiting your state’s insurance department or contacting a financial expert familiar with life settlements in your state.
- Work with a buyer who is licensed in your state to protect against fraud or scams.
Finalizing the Sale
After you qualify for a life settlement and accept an offer from the buyer, you’ll enter the sale transaction part of the process. During this final stage of your life or viatical settlement, you’ll complete the paperwork needed to officially transfer ownership of your life insurance policy to the buyer. This typically includes signing a life settlement agreement and submitting any required medical records. Depending on the provider and your insurance company, additional documentation may be needed to finalize the transfer.
Once all forms are submitted and approved, the buyer becomes the new policy owner and takes over responsibility for managing the policy and paying future premiums. At that point, you’ll receive the lump-sum payment as agreed in the settlement contract to use as you please.
Financial and Legal Implications
Selling your life insurance policy can have financial and legal implications, including tax considerations and possible effects on estate planning. Here’s what you need to know:
Tax Considerations
When you sell your life insurance policy, the amount you receive in cash for the policy could be subject to taxes depending on a few factors. If you receive an amount up to the total amount of premiums you paid into the policy, those funds are not taxed. Anything more than the premiums paid towards your policy but less than the cash surrender value will be taxed as ordinary income. Anything greater than the cash surrender value will be taxed as capital gains.
Viatical settlements have some exemptions. In a viatical settlement, since the insured must be terminally or chronically ill with two years or less of a life expectancy, their cash payout is typically not taxable.
Impacts on Public Assistance and Other Benefits
Due to the possibility of your life settlement payout being greater than the cash surrender value, it can be taxed as income or capital gains. When that occurs, your eligibility for specific programs, such as Medicaid, could be affected. Because the proceeds from a life settlement could be considered income or an asset that impacts your qualifications for Medicaid, you may no longer qualify for that benefit. However, folks can reapply for Medicaid if/when they meet the requirements.
Effects on Beneficiaries
Another factor to consider is how selling your policy could impact inheritance and financial security for your beneficiaries. When you sell your life insurance policy, you are signing over the ownership and responsibility to the buyer. This means they will also become the beneficiary and receive the death benefit upon the insured’s death. When this happens, your beneficiaries will not receive the death benefit and may need to reevaluate their finances if they originally expected to receive the death benefit from your life insurance policy.
There is another option called a retained death benefit with a life settlement. While it does not provide your beneficiaries with the full death benefit you initially planned on them getting, it still provides them with a portion of the death benefit. This portion would be significantly lower than what they would’ve received with the full death benefit and may affect your life settlement offer amount. Still, when you talk to your life settlement provider, this option could provide you with cash now, eliminate your premium payments, and provide some future financial security to your beneficiaries.
Alternatives to Selling Your Life Insurance Policy
If your premiums are getting too expensive or you don’t want your life insurance policy anymore, getting your policy appraised for a life settlement can help you evaluate how much you could receive as a cash payout. While a life settlement provides, on average, four times the cash surrender value of a policy, there are other alternative options you can consider.
Using the Cash Value of the Policy
If you need cash and have a permanent policy that accumulates cash value as you pay premiums, you have a few ways to access those funds without selling your policy. You can do so by taking out a policy loan or withdrawing directly from your funds. By taking out a policy loan, you borrow against your policy’s cash value and typically repay the loan with interest. Since you use your accumulated cash value as collateral, a policy loan is an easy option to access money and pay the loan back on your schedule.
Another option is to withdraw directly from your cash value. By directly withdrawing, you give yourself access to funds you already put into your policy, but there are drawbacks. If you withdraw more than the premiums you paid into the policy, the money could be taxed as income. Also, your death benefit could permanently decrease based on the amount you take out and the terms of your policy. It is important to know these aspects before considering a policy loan or withdrawal.
Converting to a Whole Life Insurance Policy
If you have a term policy and can’t sell it, converting the policy could be a good option. Typically, when you get a term life insurance policy, you can add a conversion rider on your policy, allowing you to convert to a universal or whole life policy within a specific time frame before the term ends. This allows you to receive continuous coverage for the rest of your life, and you can start building the cash value component of the whole life policy. Potential drawbacks include an increase in premium payments and less flexibility. When you choose a whole life policy, you will have a fixed death benefit and premium costs that you must regularly pay to keep the policy active, with little room for flexibility to adjust payments.
Accelerated Death Benefits
When you purchase a life insurance policy, you can add an accelerated death benefit rider. An accelerated death benefit rider allows you to access a portion of your death benefit while you are still alive if you meet certain requirements. The most common reason to use an accelerated death benefit rider is if you are terminally or chronically ill and have two years or less to live. With this option, you can access the portion of your death benefit to pay for bills, living expenses, and anything else you may need. However, this does result in a decrease in the death benefit that your beneficiaries will receive after your death.
Changing the Beneficiary or Reducing the Death Benefit
To manage your premiums and maintain affordability, changing beneficiaries or reducing the death benefit could benefit your financial and personal goals. If your life circumstances change, such as a divorce or having financially independent children, you can change the beneficiary to an individual that aligns with your current goals, such as another family member or a charity organization. Reducing the death benefit could also lower your premiums because you would now be paying for less coverage. This could be a good idea if you cannot afford your current premium payments or no longer need the coverage you had before due to fewer financial obligations in retirement.
Surrendering the Policy
Suppose you can no longer afford your premium payments or don’t need the coverage anymore. In that case, you might think that surrendering your policy is the best option because you can receive the cash surrender value from your life insurance carrier. Permanent policy owners may be eligible to surrender their policy for a cash payout. However, term policy owners will not receive the surrender value of their policy since the structure of the policy does not include a cash value component. Permanent policy owners who have accumulated cash value in their life insurance policy may want to consider the following before surrendering their policy back to the carrier:
- Carrier paperwork: When you surrender your policy, you must notify your carrier and complete the necessary paperwork.
- Surrender fees: They will then take away any fees or outstanding loans and then pay you the cash surrender value, which signifies that coverage ends and your beneficiaries no longer receive a death benefit.
- Taxes: While surrendering could provide immediate cash, if you receive more than the premiums you paid into the policy, you might owe taxes on those funds.
- Payout value: When you surrender your policy, you receive the accumulated cash value minus any taxes and fees. This amount is, on average, four times lower than a life settlement cash payout. Getting a life settlement appraisal before you surrender your policy can help you evaluate which option works best for your situation.
Types of Life Insurance Policies That Can Be Sold
There are two main types of life insurance policies: term life insurance and permanent life insurance (whole, universal, and variable). Both types of policies can be eligible to sell in a life settlement, but it is important to understand the life settlement requirements for eligibility.
Term Life Insurance Policies
A term life insurance policy is a more affordable form of life insurance that typically only lasts 10-30 years before coverage ends. Unlike a permanent life insurance policy, there is no cash value within a term life policy. But, there is still a way that you can cash in on a term life policy. While some providers do purchase term policies as is, others often require policies to have a conversion rider that allows the term policy to convert to a permanent policy. This ensures the provider can maintain coverage and receive the death benefit by paying premiums for the rest of the insured’s life.
Permanent Life Insurance Policies
Permanent life insurance includes whole, universal, and variable life policies, all of which provide lifelong coverage as long as premiums are maintained. One of the key features of these policies is the cash value component, which accumulates and grows over time and can significantly increase your policy’s appeal to buyers. If you’re considering selling, this hidden value may offer more than just a safety net — some policies may even contain untapped cash that you’re not aware of!
Unlike term policies that expire, permanent life insurance can be surrendered or sold depending on your financial needs. Before making a decision, it’s helpful to understand the difference between surrendering your policy and selling it in a life settlement. Getting your policy appraised for a life settlement can give you information on your policy’s worth compared to its surrender value. Get an appraisal today!
Glossary of Terms
Whether you’re ready to sell your life insurance policy or simply evaluating the best option for you, it’s always a good idea to familiarize yourself with the language that life insurance carriers and life settlement providers use. Knowing common terms can give you a better understanding of the policy you own and help you learn about the life settlement process before moving forward with the transaction.
Life Settlement Provider
A life settlement provider is a third-party purchaser of life insurance policies. Providers are typically companies whose primary purpose is to purchase life insurance policies from policyowners and provide them with immediate cash payouts to use as they please. In a life settlement transaction, a provider will require a policyowner interested in selling their policy to fill out an application and provide medical records. Once approved, they will buy the policy from the original owner, become the new policyowner, and take over premium payments for the remainder of the insured’s life. Once the insured passes away, the provider will then receive the death benefit. As you evaluate life settlement providers, make sure to choose one that is licensed in your state.
Premiums
Premiums are regular payments a policyowner owes to a life insurance carrier to keep their policy active. Premiums can be fixed or flexible amounts based on your policy type. Other factors determining the cost of premiums include the insured’s age and health status, and the policy’s duration (which only applies to term policies ending at a set time). Premium payments can also be made monthly, semi-annually, or annually, depending on your insurance carrier. If you stop paying your premiums, your policy will lapse, and your coverage will end without any death benefit payment going out to your beneficiaries. If you keep paying your premiums until your death, your beneficiaries will receive the entire death benefit of your policy tax-free.
Death Benefit
A death benefit is the total amount of money your beneficiaries will receive upon your death if the policyowner continues to make premium payments. If you have a policy with a lower death benefit, your premiums will be cheaper than if you were to have a policy with a higher death benefit. The policyowner and the insurance carrier usually determine the death benefit based on the life of the insured and how much coverage their loved ones would need if the insured were to pass away. The death benefit can be used for many different purposes: to supplement extra household income if the surviving spouse and child need it, to cover medical bills, to provide funeral costs for the insured, for estate planning purposes, or any other number of expenses that would fall on the insured’s loved ones after their death.
Frequently Asked Questions (FAQ)
When considering selling your life insurance policy, it is natural to have questions about eligibility requirements, the life settlement process, and outcomes.
Common Procedural Questions
How do I sell my life insurance policy? You can sell your policy through a life settlement, where a licensed third-party provider will purchase your policy. You will then receive a lump sum of cash, and the provider will take over the policy’s premium payments. After the insured’s death, the provider will collect the death benefit.
What documents do I need? To complete a life settlement, you must fill out an application with the licensed provider. They will often ask for your policy and any other information you have on it, such as loans or withdrawals, along with your medical records.
Financial Implications FAQs
How much money will I receive for my policy? The cash payout will vary between individuals, but generally, people receive, on average, four times the surrender value.
Are there any taxes on the money I receive in a life settlement? The funds will not be taxed if you receive a payout less than the total premiums you paid. If you receive more than the amount paid into the policy but less than the cash surrender value, the money will be taxed as income. If the payment exceeds the cash surrender value, the money will be subject to capital gains taxes.
Legal Concerns FAQs
How are life settlements regulated? Life settlements are regulated on a state-by-state basis. It is up to each state to determine what rules and regulations are in place for life settlements. So, check out your state’s insurance website or speak with a financial professional who is informed about your state’s life settlement regulations.
Will selling my policy affect my estate or government assistance programs? Selling your policy could impact estate planning and government assistance programs like Medicaid. When you sell your policy, your beneficiaries will no longer receive the death benefit, which could affect estate planning. The funds you receive from the sale can be seen as an asset or income that could change your estate value or impact Medicaid eligibility.
What legal protections do I have when I sell my policy? Many states require life settlement providers to be completely transparent with relevant information such as the life settlement terms, fees, and commissions, and your right to withdraw from the offer within a specified period.
Conclusion
Selling your life insurance policy is a big decision that can impact your life and that of your loved ones. While your beneficiaries might not receive the death benefit, you will receive an immediate cash payout after the sale, which can be used to pay off bills and debts or travel to places you’ve always wanted to visit. Before proceeding with a life settlement, review the eligibility requirements to see if you can sell your policy and consider the financial implications in your life. Make sure to speak with a financial expert who is familiar with life settlements in your state and can help you make the best financial decision.
Submit your policy today to find out if you qualify for a life settlement with Coventry Direct!
