Deciding what to do with a life insurance policy you no longer need or can afford is a significant financial question. Many policyholders don’t realize that letting a policy lapse or surrendering it for a minimal cash value aren’t their only options.
There is often a better choice: selling the policy.
But this raises an important question: when is the best time to sell life insurance? While there is no prescribed time limit, certain moments are more advantageous than others. Discussions often start in early January or December, as people review their finances for the new year. Tax season is also an ideal time to consider this option, as are the summer and winter holidays, when families re-evaluate their long-term needs.
The truth is, the optimal time is deeply personal and often comes when the stress of holding on begins to outweigh the value it’s providing. Whether your premiums have become a burden, your financial needs have shifted, or your original reason for the policy no longer exists, understanding your options is the first step toward making a sound decision.
What Does It Mean to Sell a Life Insurance Policy?
Selling a life insurance policy, known as a life settlement, is the process of transferring ownership of your policy to a third-party investor for a one-time cash payment. This payment is more than the policy’s cash surrender value but less than its full death benefit.
In a life settlement, the buyer takes over the responsibility of paying the future premiums and receives the death benefit when the original policyholder passes away. This option provides a way for you to receive a significant lump sum of cash from an asset you might otherwise let lapse. Think of it as unlocking the hidden value in your policy while you are still alive.
4 Signs It Might Be the Best Time to Sell Your Life Insurance
Recognizing the right moment to sell your policy depends on your unique circumstances. Here are four common signs that indicate now might be the best time to explore a life settlement:
Your Premiums Have Become Unaffordable: Life changes, such as retirement or unexpected medical expenses, can strain your budget. If paying your life insurance premiums has become a financial burden, selling the policy can provide immediate relief and give you a substantial cash payment instead of letting it lapse and receiving nothing.
You No Longer Need the Coverage: The reasons you bought life insurance years ago may no longer apply. Perhaps your children are financially independent, you’ve paid off your mortgage, or your spouse has sufficient retirement savings. If the original purpose of the policy is fulfilled, selling it can convert that asset into liquid cash for other goals, like travel or long-term care.
You Need a Lump Sum of Cash for Other Expenses: Life settlements can provide a significant infusion of cash to cover pressing financial needs. Many people use the funds to pay for medical treatments, supplement their retirement income, eliminate debt, or even invest in a new business venture. It’s a practical way to access capital tied up in your policy.
Your Policy Is About to Lapse or Expire: Many term life insurance policies expire without paying a benefit, and universal life policies can lapse if the premiums or cash value are insufficient. Selling the policy before it terminates allows you to recover a portion of the money you’ve invested over the years, turning a potential loss into a financial gain.
How to Determine If You Qualify to Sell Your Policy
Not every life insurance policy is eligible for a life settlement. While specific requirements vary by state and buyer, there are some general criteria that most providers look for. Understanding these can help you determine if selling is a viable option for you.
Age Requirements: Typically, you must be at least 65 years old. However, younger individuals with significant health impairments may also qualify.
Policy Type: Whole life, universal life, variable universal life, and convertible term life policies are the most commonly sold types.
Policy Size: Most buyers look for policies with a face value (death benefit) of $100,000 or more.
Health Status: A change in your health since you first purchased the policy is a key factor. Life settlement investors calculate offers based on life expectancy, so a shorter life expectancy generally results in a higher offer.
How to Sell Your Life Insurance Policy
Navigating a life settlement can seem complex, but breaking it down into steps makes it more manageable. Following a structured process ensures you make informed decisions and protect your interests.
Consult a Financial Advisor: Before making any decisions, speak with a trusted financial advisor or tax professional. They can help you understand the implications for your estate, taxes, and overall financial plan. This is a crucial step in ensuring your decision aligns with your long-term goals.
Gather Your Policy Documents: Collect all relevant paperwork, including your original policy documents, recent statements showing cash value and death benefit, and any premium notices.
Find a Licensed Life Settlement Broker or Provider: You can work directly with a life settlement provider (a company that buys policies) or a life settlement broker who represents you and shops your policy to multiple providers to find the best offer.
Submit Your Application and Medical Records: You will need to complete an application and authorize the release of your medical records. The buyer will use this information to assess your life expectancy and formulate an offer.
Receive and Evaluate Offers: If you qualify, you will receive one or more cash offers. Carefully review each one with your financial advisor. Consider not only the amount but also the buyer’s reputation and the terms of the sale.
Close the Transaction and Receive Funds: Once you accept an offer, you will complete closing documents to officially transfer ownership of the policy. After the transfer is complete, the funds will be placed in an escrow account and then released to you.
Frequently Asked Questions (FAQ)
How much can I get for selling my life insurance policy?
The amount you can get varies widely but is typically 20% to 60% of your policy’s death benefit. The final offer depends on several factors, including your age, health status, policy face value, and the cost of future premiums.
Are the proceeds from a life settlement taxable?
Yes, the proceeds may be taxable. The portion of the payment up to your policy’s cost basis (the total premiums you’ve paid) is generally tax-free. The amount exceeding your cost basis but less than the cash surrender value is taxed as ordinary income, and any amount above that is taxed as a capital gain. It is essential to consult a tax professional to understand your specific obligations.
Are there alternatives to selling my life insurance policy?
Yes, there are several alternatives. These include taking a policy loan, using the cash value to pay premiums, accessing accelerated death benefits if you are terminally ill, or reducing the death benefit to lower your premiums. Discussing these options with your insurance provider and a financial advisor is highly recommended.
Final Thoughts
The best time to sell life insurance isn’t dictated by a calendar but by your personal and financial circumstances. When your policy no longer serves its original purpose or its costs become unsustainable, a life settlement can transform it from a liability into a valuable liquid asset. By understanding the process, qualifying factors, and potential benefits, you can make a confident, well-informed decision that supports your financial well-being now and in the future.