How Do Life Insurance Buyouts Work?

Published April 13, 2024

For those seeking long-term financial security for their loved ones, life insurance can be a fitting solution. But what happens when it’s no longer affordable? If your premiums are too expensive, or if your policy is otherwise financially infeasible, you may want to consider a life insurance buyout.

A life insurance buyout is a means of ending your obligations of paying premiums toward your life insurance policy while receiving a cash payout. Here’s how it works: a buyer purchases your policy for a cash lump sum and, in turn, takes responsibility for all subsequent premium payments. Following your death, the buyer receives the full benefits of the policy.

Keep reading to learn more about life insurance buyouts, and whether you may qualify.

Who Can Buy Your Life Insurance Policy?

Life insurance policies are typically sold to life settlement companies. These policies are considered valuable financial assets: the buyer, as the new policy owner, typically makes back more than their original investment of the initial lump sum payment and all subsequent premiums.

As long as the buyer keeps up with their premium payments, the policy remains valid and active. Regardless of who the final policy beneficiary is, insurance companies are required to make a payout when the person named in the policy dies.

What Does the Life Insurance Buyout Process Look Like?

The life insurance buyout process usually involves a few standard steps. Read on to learn how it works.

Decide If a Life Insurance Buyout Is Right for You

Selling a life insurance policy is a major—and permanent—choice. Consider the following when making your decision:

  • Is this the right time to seek a life insurance buyout? Life settlement candidates are typically 65 years of age or older, with the average age being approximately 75. Individuals typically opt for a life insurance buyout when they can no longer afford their premiums or when they believe their policy is no longer necessary.
  • Will the policyowner need life insurance in the future? Life insurance buyouts are irreversible, so it’s important to consider whether you may need your policy in the future.
  • Does this decision make sense for the policyowner’s family members? For those in need of immediate cash—individuals struggling to pay for long-term care, for example—a life insurance buyout may be the most practical choice. But for those who might not need immediate funds, and whose family members may benefit greatly from the policy’s full payout, the decision may require more thought.

Consult with a Financial Advisor

To ensure you’re making the right decision, consider turning to a trusted financial advisor or tax expert for guidance. Aside from providing financial advice based on your personal situation, your advisor can walk you through any potential tax implications that may arise from the sale of your life insurance policy.

The Process of a Life Insurance Buyout

The life insurance buyout process is as follows:

  • The policy owner sends their life insurance policy and their most recent medical records to the life settlement company. This step ensures that the life settlement company has everything it needs to qualify the policy. Here, the policy owner provides basic information about themselves and their policy. Those who do not meet the minimum qualifying factors will not proceed with the process, while qualified candidates will be asked to provide medical record authorization and more information on the policy.
  • The life settlement company reviews the health of the policyowner and the structure of their life insurance policy.
  • The life settlement company comes up with an offer based on its findings. This offer is informed by the premium payment structure, cash value, loans, and health of the policyowner, among other factors.
  • The policyowner receives an offer from the life settlement provider.
  • The policyowner decides whether to accept or reject the offer. If the policyowner accepts the offer, the payment is placed in escrow while both parties finalize documentation.
  • Life insurance policy ownership is transferred, and funds are released. The process typically takes anywhere from 6 to 10 weeks. Your process may be shorter or longer, however, depending on your situation. Moreover, different types of life insurance policies may warrant additional review.

What Makes a Better Settlement Offer?

Some offers may be better choices than others. Usually, life settlement companies will pay more for policies with high payouts, low monthly payments, and owners in poor health.

What’s the Alternative to a Life Insurance Buyout?

One alternative to seeking a life insurance buyout is taking a policy’s cash surrender value. Some life insurance policies—particularly Whole Life and Universal Life policies—accrue a certain cash value based on the age of the policy and how much the policy owner has contributed to the account. Should the policy be terminated, that cash value (net of any fees or penalties) is given to the policy owner.

A policy’s cash surrender value tends to be considerably less than its full death payout. As with life settlements, these payments are typically used to fund retirement and care-related expenses.

While seeking cash surrender value may seem like an easy way out, pursuing a life insurance buyout may be a better means of getting more money out of your life insurance policy. After all, those who opt for a life settlement typically get at least four times more than their policy’s cash surrender value.

What Makes You Eligible for a Life Insurance Buyout?

Life insurance buyout requirements ultimately vary by life settlement company. However, a handful of factors typically determine whether you can sell your life insurance:

  • Age: In most cases, the seller must be 65 years old or older to be eligible for a life insurance buyout. Because policies grow more valuable with age, older policy owners are more likely to find a buyer.
  • Value: Most insurance policy buyers pursue policies worth $100,000 or more.
  • Life expectancy: Policies belonging to those with a shorter life expectancy are considered more valuable.

For many policy owners, a life insurance buyout can be a relatively quick means of funding long-term care, retirement, and other crucial expenses. Considering a life settlement for your life insurance policy? Wondering whether you’re eligible? Take the first step toward long-term financial security today: learn about how much your life policy is worth, and whether you qualify.

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