If you’re thinking about selling your life insurance policy for cash, you’re likely weighing a list of pros and cons. After all, selling a policy you’ve owned for years can make you feel a bit apprehensive.
Whether you’re looking for a way to offload monthly premiums or you need cash quickly to pay for retirement costs, it’s best to think through every single benefit and disadvantage before selling your life insurance policy. Let’s explore the many upsides (and downsides) of selling your policy for a cash payout.
How does selling your life insurance policy work?
When you sell your life insurance policy, a third-party buyer purchases your policy. The buyer is typically a licensed life settlement provider and they may provide cash, a new policy with no future premiums, or a combination of both as payment for your policy. The policy ownership is transferred from you to the buyer and upon your passing, they will receive the death benefit instead of your beneficiaries. In some cases, if you choose to sell only part of your life insurance policy (this option is called a “Retained Death Benefit”), then your beneficiaries can receive a portion of a life insurance policy death benefit alongside the third-party buyer.
There are several reasons why folks choose to sell their life insurance policy to a life settlement provider. Whether they no longer need the policy or can no longer afford the premiums, a life settlement provides a lucrative option that, on average, yields four times the cash surrender value.
Selling your life insurance: pros and cons
Now that you have a great understanding of how the process works, it’s time to explore the advantages and disadvantages of selling your life insurance policy in a life settlement. You’ll learn about the upsides — like getting a larger payout than simply surrendering your policy — and the downsides — such as the hassle of selling your policy. Let’s dive into selling life insurance: the pros and cons!
The Pros
No more monthly premiums.
When you sell your life insurance to a life settlement provider, they take over the ownership of the policy, including the monthly premiums. Since premiums usually increase as you get older, you’ll be able to remove increasingly expensive premiums from your monthly expenses and receive a one-time payment for your life insurance policy from the life settlement provider. It’s a win-win.
Higher payout than surrendering or lapsing.
While the majority of life insurance policies are lapsed or surrendered for a small amount, a life settlement can provide a significant payout that’s above and beyond the cash surrender value. On average, life settlement proceeds are four times the cash surrender value, putting more dollars into the pockets of seniors (instead of life insurance companies).
Cash payout now.
Life situations change as you grow older. Whether your beneficiary is no longer alive or your adult children are financially independent, they may not need the death benefit as much as you may need cash for retirement, healthcare costs, or long-term care now. Sometimes, getting the value from your life insurance plans now (instead of later) can help you create a healthier financial runway for the long haul.
Use the proceeds for anything.
With a life settlement, you’re free to use the cash proceeds any way you’d like. There are no restrictions on what you can purchase. Some folks use the cash as extra retirement savings. Others need the cash to pay for assisted living. And others yet decide to use the cash to take their family on a memorable vacation getaway. You decide how to use your money when you sell your policy.
The Cons
You may be taxed on your life settlement proceeds.
Life settlements can come with a tax bill depending on your individual situation, but you will generally not be taxed on the entire cash payout. Rather, whatever profit you make from the settlement (your life settlement proceeds minus the cost of insurance) is taxed as long-term capital gains. Work with a tax specialist to ensure a life settlement makes sense for your unique situation. Learn more about the tax implications of cashing in a life insurance policy.
Beneficiaries may get a reduced or no death benefit.
Depending on whether you decide to retain some death benefits for your beneficiaries, your loved ones will most likely not receive any money from your life insurance policy upon your passing. Because the life settlement company takes the financial risk when taking ownership of the policy, they receive part or all of the death benefit.
You may not qualify for another life insurance policy.
When you sell your life insurance policy, life insurance providers will be less than keen on selling you another life insurance policy should you need one. Before you sell your life insurance policy in a life settlement, you should make sure you won’t need life insurance in the future.
So, is selling your life insurance policy a good idea?
When it comes to the pros and cons of selling your life insurance policy, a life settlement is a much better idea than lapsing or surrendering it. Selling your life insurance policy is more lucrative than surrendering or lapsing it. Plus, you eliminate monthly premiums.
For folks who have already decided on surrendering or lapsing their policy, find out if you qualify for a life settlement instead. You could walk away with a much higher payout.
Wondering if you qualify for a life settlement?
A life settlement can provide a windfall of cash when you need it most. Seniors who are 65 years or older and own a life insurance policy that’s worth at least $100,000 will likely qualify. Most kinds of life insurance policies qualify, including whole life, universal life, variable life, survivorship, group life, and even life insurance term policies that are convertible. Consider consulting with Coventry Direct for more information on selling your life insurance for cash.