Perhaps you’ve seen the commercial on TV with an elderly couple smiling because they’re selling their life insurance policy for cash. Sound too good to be true? Can you really sell your life insurance policy like your old car? Yes — it’s called a life settlement, and it’s a real thing.
If you have life insurance you got for your kids but they're all grown up now, maybe you find you don’t need the policy anymore. What can you do with it? Instead of letting the policy lapse or surrendering it for pennies on the dollar, you could consider a life settlement. A life settlement can sometimes get you four to five times as much money as simply letting the policy go.
What is a Life Settlement?
A life settlement is a fancy way of saying you're selling your life insurance policy to a third party investor, and you’ll find that plenty of companies are interested in buying it. While the sale amount is definitely greater than the surrender value, it’s still nowhere near the original death benefit. Still, if your insurance policy has outlived its usefulness, selling it to a third party is not a bad option.
Life insurance policies sell, on average, for around 22% of the face value, even though they can go as high as 50% or even 60%. If you have a $500,000 life insurance policy, that means you can sell it to an investor for $110,000. Not too shabby. Sure beats just letting the policy go.
If you’re a senior and your kids are all grown up with families of their own now, you’ve done your job. Now it’s your turn to reap the benefits from the money you’ve invested in a life insurance policy, especially if you’re retired. Important to note: life settlements count as income and not a death benefit, so they’re subject to taxation. You only pay taxes, however, on the amount you profited: your profit is the amount you sold the policy for minus the amount you paid in premiums.
How do Life Settlements Work?
How can your old life insurance policy be worth something to someone else while you’re still alive? It’s simple, actually. When you sell your insurance policy, you change the beneficiary to the purchaser, then it keeps paying the premiums until you die. When you die, it cashes the policy in. Simple as that.
Of course, there are rules. You can’t sell your life insurance policy to anyone. Buyers are required to have a license. There is a due diligence period where your health is evaluated. Then, an offer is tendered. Typically, the whole process takes anywhere from 3 to 8 weeks. The main issues considered when transacting a life settlement include:
- Premium must be manageable: If you’re thinking about selling your life insurance policy because your premiums have gone through the roof, remember that the buyer is going to have to assume those same premiums. Sky-high premiums can often be a dealbreaker when it comes to transacting a life settlement.
- Policy should have a death benefit of at least $100,000: The higher the death benefit, the better chance someone’s going to want to buy your policy. Most companies do have a rule that the death benefit must have a value of at least $100,000.
- Seniors are 65+ are preferred: While there is no age qualification, it’s more difficult to find a buyer if you’ve statistically got many years to go until you die. Seniors get preferential treatment because generally speaking, their remaining years are dwindling.
Types of Life Insurance for Life Settlement
Remember that when you engage in a life settlement, your life insurance policy continues as before. The two main things that change is that the purchaser of your policy now becomes the beneficiary and that it starts paying the premiums.
When it comes to the types of life insurance you can sell, life settlements exist for both term and permanent policies. Types of life insurance policies that can be sold include:
- Term life
- Whole life
- Universal life
Permanent policies are preferred because if the seller has term life, there is the possibility they could outlive the policy. Because of this, investors prefer a term insurance that can get converted into a permanent policy.
While both term and whole life policies can be sold, the majority of policies in life settlement transactions are universal life policies. The reason for this is that the premiums for universal life are often lower than those of whole life, making it more attractive for investors. On the flipside, because premiums are flexible in a universal policy, policyholders often find themselves in trouble with their premiums rising and are more willing to sell.
Who Should Seek a Life Settlement?
When talking about selling your life insurance policy, usually the focus is on seniors. If you’re 65 or older and the whole reason you had a life insurance policy in the first place is no longer valid, then why not cash in your investment? You can use the money to pay bills or for something fun like taking a cruise. The average age for life settlements is 75. Investors aren’t typically interested in young people because they still have too long to live.
Benefits of Life Settlements
Other reasons might spur you to sell your life insurance policy.
- You no longer need the policy: Many reasons exist for no longer needing your life insurance policy. Perhaps you got it for the duration of a job or when an adult child was struggling. The main reason people sell their insurance policies is because they don’t need it now.
- You need the money: Sometimes you just need the money. Or maybe you want the money for something else. Either way, another big motivation to choose life settlements is for cash.
- The policy is going to lapse: Why let something of value go to waste? Whether the premiums are getting too expensive or you’ve fallen on hard times, if you can’t make your payments, don’t let something of value go to waste. Selling your policy could net you thousands of dollars depending on the amount of the death benefit and how much you’ve paid into it already.
- Emergencies: Sometimes life throws you a curveball. The whole reason you bought life insurance in the first place was to protect against the unexpected. Now, selling your life insurance policy could be just the thing that saves the day.
Drawbacks of a Life Settlement
Several important reasons may deter you from selling your life insurance policy:
- You may have to pay taxes: When you cash your life insurance policy in, the part that the government considers a profit is subject to taxation. Your profit is the amount of the life settlement minus how much you’ve paid in premiums. If the taxable amount is high, you could get a loan instead of choosing the life settlement. While you may have to pay interest, it’s not considered income and thus not taxable.
- You could get disqualified for government support: Your sudden windfall may lift you into a higher tax bracket and make you ineligible for certain government programs like:
- SNAP benefits
- Section 8 housing
- Money may go to creditors first: If you owe money, your creditors may get the first slice of the pie. Although creditors cannot collect on money owed from your death benefit to your beneficiaries, a life settlement payout is not a death benefit.
- Settlement shares depend on your age: It may be that you can get as much as 60% for your life settlement, but a high payout is usually only true for older policyholders 70 years and up who’ve been diagnosed with a terminal illness. Typical payouts are much lower.
A Trusted Life Insurance Source
When it comes to life settlements or any information on life insurance, no one has more informative articles than Benzinga. Find everything you need to know about all types of life insurance — term, whole and universal — at the trusted life insurance source — Benzinga.
Frequently Asked Questions
Who qualifies for a life settlement?
Anyone who owns a life insurance policy and is current on their premiums qualifies for a life settlement. The insurance can be term or permanent life. Life settlement investors typically prefer policyholders who are older with low premiums. The average age for people who sell their policies is 75 years of age.
Who can purchase a life settlement?
Purchasers of life settlements are licensed third-party investors. A growing number of companies today specialize in buying life insurance policies.
What types of insurance can be sold?
All types of life insurance, from term to whole and universal life, can be sold. As long as premiums are up to date, a policy qualifies for life settlement. Whether a purchasing company chooses to purchase a particular policy depends on its business model.
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