Over time, you may find that your life insurance policy no longer fits your needs as it did before. It may be too costly, approaching its maturity date or term conversion deadline or you need to redirect the premium payment to cover other expenses or debts. Rather than surrender or lapse, selling your policy may be your best option.
When it comes to permanent life insurance such as whole life, you may be even better served by selling your policy. This option provides an average of four times more cash than you’d get from the surrender value. Just about any policy type may qualify, including term life, universal life and whole life. While the transaction is mostly the same across policy types, there are some unique differences you should be aware of.
The Main Types of Insurance Policies
There are two main types of life insurance policies: term and permanent, which includes universal life, whole life and others. These policies are not one-size-fits-all — and there are advantages and disadvantages to each that influence why people choose them and what the process of selling your life insurance is like for those who choose to sell.
Permanent/Whole Life Insurance
With a permanent life insurance policy, the insured has coverage throughout their entire life, so long as premium payments are current or the policy is “paid up.”
Permanent life insurance combines a death benefit with a savings component that accrues as premium payments are made. This is due to a portion of the premium payment being directed into a savings component built into the policy.
In permanent life insurance policies, the death benefit and accrued cash value can be viewed as separate components of the policy. In the case of whole life insurance, the cash surrender value is accrued through dividends that the insurance company earns, while universal life policies are often supplemented by the premium payments.
When the insured passes away, the beneficiaries receive the death benefit while the insurance company receives the accrued cash value. While the insured may borrow against the accrued cash surrender value, any outstanding loan amount will be deducted from the death benefit.
Term Life Insurance
Term life insurance is just as it sounds — a policy that spans a designated length of time. Premium payments are made for a fixed period of time between 5 and 35 years, and if the insured passes away during the policy term, the beneficiaries will receive the death benefit. The policy expires if the policyowner outlives the term, but most companies allow policy renewals or conversions to permanent plans within a predetermined window of time.
Unlike whole life policies, there is no cash savings component. This makes premiums lower for term life insurance compared to permanent life insurance.
Why Do People Choose Whole Life?
Although whole life policies typically have higher premiums, they can prove beneficial as a result of the money that accrues throughout the life of the policy.
The main difference between the two types of permanent life insurance policies — whole and universal — are the premium payments. Premiums for universal life insurance policies are typically more flexible and cost less than those for whole life.
Whole life insurance has fixed premium payments which allow more cash to accumulate over time. It also offers a fixed death benefit. With universal insurance, the interest rate an insurance company implements can change year-to-year, so the value of your policy’s death benefit will change with it.
Term policies are temporary, or for a set “term.” When purchasing term insurance, the insured chooses how long they want their policy to be active, and when that time is up they can either renew it, cancel it or in some cases convert it into a permanent policy––though the premiums will likely increase substantially. While a term policy doesn’t accrue a cash surrender value, that doesn’t mean that a term policy doesn’t have cash value as it may still be an attractive policy for a provider to purchase.
Whole life insurance provides a level of comfort to policyowners by ensuring that the policy will never expire, the premium rate will remain consistent and the cash value will increase with time.
Cashing-Out Whole Life Insurance
When people refer to “cashing out” a whole life insurance policy, they mean surrendering the policy for the cash surrender value. When a policy is surrendered, the policyowner receives the cash surrender value, less any outstanding loan amounts, but not the total death benefit. By selling the policy instead, the policyowner may receive an amount that is much greater than the cash surrender value, but less than the total death benefit. Getting an appraisal is the best way to determine what a policy is worth, and whether selling or surrendering a policy makes the most sense.
There are other options for accessing cash from a whole life policy, though selling it is typically the most lucrative.
The insurance provider and policy type dictates how much money can be taken out via withdrawal. Before considering a cash-value withdrawal, ask your provider what the consequences of doing so are—it often means higher premiums or a reduced death benefit. Finally, if a policy is a Modified Endowment Contract, it will be taxed and a 10% early withdrawal fee will be charged to the insured.
Loans can be taken out with select insurance companies by using the cash value of the policy as collateral. While you won’t be required to repay the loan if you elect not to, you will still be charged interest and any outstanding loan balance will be recouped from the death benefit.
Surrendering Your Policy
Policies can be surrendered for the accumulated cash value. The main drawbacks to this method are that this cash can be taxed, beneficiaries will receive no death benefit and there is usually a surrender fee. Consult a tax professional to determine just how much a life settlement will be taxed. It also might become difficult for an insured person to find replacement coverage later on, and they will most likely have to take on a term policy — especially if their health has declined.
Selling Your Policy
Selling a whole life insurance policy is usually the most lucrative option available if you qualify. If you decide to sell your policy, there are several factors to consider when assessing how much cash you’ll actually receive.
A major component in calculating the value of the policy depends on the policyowner’s life expectancy, which takes into account a person’s age and health status and is calculated based on mortality studies across large populations. Additional details can also impact its value, including policy size, premium payments and the type of policy.
Is Your Whole Life Insurance Policy Taxed?
Typically, whole life insurance policies are not taxed because contributions made to these types of policies are done so using after-tax money. Loans and the death benefit are also not taxed.
It’s important to note that if the savings component of your policy’s cash value is invested with the intention of growing over time, it can be taxed. While the premiums paid are not taxed, any additional money made through investments will be. See our article for more information on the tax consequences of selling your life insurance.
When cashing-out your whole life insurance policy or selling it to a third-party buyer, there are certain factors to consider, such as your current and future needs, your current life situation and your financial plan. There are many options available to choose from and it all boils down to what will work best for you. Here are some crucial things to ask yourself before you reach a conclusion:
- Death benefit: Do you have beneficiaries that will rely on the policy’s death benefit?
- Taxes: How much will you be taxed if you were to sell?
- Policy: Is your policy attractive to life settlement providers?
If you find that you no longer need your policy, selling it may make sense. Coventry Direct can help you get started. For more information and to find out if you qualify, contact us today.