Can I Sell My Life Insurance Policy?

During times of financial hardship, you may struggle to continue paying your life insurance premiums. Missing payments could result in the insurance company canceling your policy. You lose your death benefit, but you also end up wasting the money that you previously paid into premiums. One way to avoid cancellation is to sell your life insurance policy. For some people, selling is the best option. However, you need to fully understand how the process works before you enter into an agreement.

Can I Sell My Life Insurance Policy?

Whether you can sell your life insurance policy depends on a few factors. 

Type of Life Insurance

Normally, life settlement brokers and companies only purchase permanent life insurance that remains in effect until you die. If you have a whole life, a universal life or another type of permanent insurance, you may be able to sell it.

Term life insurance expires at the end of a specified timeframe called the term. Because of its expiration date, you usually can't sell term life. However, many term policies give you the ability to convert to permanent insurance with the same death benefit. Generally, life insurance companies don't charge fees for conversions, but they do limit the amount of time that you have to take advantage of the benefit. If the conversion period has passed, you typically won't be able to sell your term life insurance.

Your Age

Normally, only older adults can sell their life insurance policies. Companies and brokers that buy life insurance usually establish a minimum age like 65.

Death Benefit Sizes

In most cases, you can only sell life insurance policies with death benefits of $100,000 or more. If you previously took out a policy loan and still owe a balance on it or have made cash withdrawals, you may be unable to sell.

What Are Life Settlements and How Do They Work?

Selling a life insurance policy is called a life settlement or viatical settlement. Life settlement companies and brokers offer the service. When you enter into a life settlement agreement, the broker or company pays you a lump sum and takes ownership of the policy. After you die, the broker or company files a claim with the life insurance company. They then receive the death benefit instead of your beneficiaries.

How Much Do You Get for Selling a Life Insurance Policy?

The amount that you receive from a life settlement company depends on the following:

• Size of the policy
• Your age
• Your health

When you buy life insurance, being young and in good health is an asset because insurers prefer to give insurance to people who are at a low risk of dying. With life settlements, the opposite is true. Companies and brokers only get paid when you die, so older people in poorer health usually receive better offers.

Generally, a life insurance settlement will pay you about 20% to 25% of the policy's death benefit amount. You're likely to end up with a smaller payout than the offered price due to fees and commissions.

Do I Have to Pay Taxes If I Sell My Life Insurance?

Yes, in most cases, money that you make through a life insurance settlement is considered income and taxable. 

Should I Sell My Life Insurance Policy?

A viatical settlement may be a good option if you can't afford your policy. You may also want to consider selling if you have enough money saved to provide for your family and settle your debts and final expenses after you die. If your only beneficiary preceded you in death, it may make sense to sell your policy.

Even if you find yourself in one of these circumstances, there are some drawbacks to selling.

• Difficulty securing a buyer. Life settlement brokers and companies may decline to buy if they don't believe they can make money on the purchase. It may take a considerable amount of time to find a willing buyer.
• Low value. Because offers on life settlements are just a fraction of the death benefit, you may not make enough from the sale to recoup the premiums paid.
• Fees and commissions. Brokers and life settlement companies may take a considerable percentage of the payout for commission and fees, leaving you with an even smaller payout.
• Increased income tax. Because the money received from a settlement is considered income, you may owe taxes or not receive your usual refund.
• Increased annual income. Your income will go up the year that you sell your policy, and that could potentially impact your eligibility for receiving various types of public assistance like Medicaid.

What Are the Alternatives to Selling?

If you can't afford your life insurance premiums, consider the following alternatives:

• Modifying your life insurance. The life insurance company may let you reduce the size of your death benefit to lower your monthly premiums.
• Canceling your coverage. Because you're unlikely to make much money and could end up owing taxes, simply canceling your policy may be a better option.
• Surrendering your policy. With permanent life insurance, you may be able to surrender your life insurance policy in exchange for some of the cash value. Normally, you pay fees for this service, but they may be less than what you'd pay for a life settlement. Surrendering your life insurance may also be less costly from a tax perspective.
• Paying with your cash value. Some permanent life insurance policies allow you to make premium payments from the cash value of your policy. This lowers the final death benefit but allows the insurance to remain in effect.
• Taking out a policy loan. You could borrow against the death benefit of a permanent life insurance policy to get money to cover other expenses, leaving you with more room in your budget to pay your premiums. You don't have to repay policy loans, but any outstanding balance will be deducted from the payout amount when you die.
• Exchanging it. A 1035 exchange may let you trade your current permanent life insurance policy for a cheaper policy or an annuity.
• Taking advantage of your ADB. If your life insurance policy has an accelerated death benefit rider or ADB and you need money because you have been diagnosed with a terminal illness, you may be able to receive a portion of your death benefit as a lump sum payment.