Selling Your Life Insurance Policy for Cash: A Step-by-Step Guide

October 28, 2019 Joe Badalis 0 Comments

People might have many reasons to sell their life insurance policy. Sometimes, customers are able to find a better deal with a competitor after undergoing groundbreaking clinical trials that improved their health. Other times, they may need cash sooner than later and no longer want to make payments on their current policy. 

Regardless of the reason, you’re certainly not the first person to wonder if “selling my life insurance policy for cash” is a valid option. This long-term financial investment isn’t for the nervous, and you might need to rearrange your finances at any given time. When you’re interested in selling your life insurance policy, here is a step-by-step guide to help make the process a little easier. 

1. Learn the jargon

While you don’t need to become an expert in life insurance, becoming acquainted with the necessary terms can help streamline the process. More often than not, selling your policy will take the form of a “life settlement,” also known as a viatical settlement. In this case, the broker or individual who buys your policy will continue to pay on your behalf. In exchange for these payments, they will receive the death benefits associated with your policy when you pass away. This frees you up to explore other options or simply indulge in the cash acquired from the settlement. 

What is the death benefit? According to Investopedia, it’s a type of insurance payout offered to the beneficiary on a life insurance policy. Often, this payout is designed to cover funeral costs or settle debts made on the deceased person’s behalf. However, this money can be used freely for the beneficiary on the account. This payment can take the form of a lump sum or a monthly pension to the beneficiary. 

2. Find a buyer

Finding a buyer is, perhaps, the most difficult part of the entire process. Depending on your monthly premiums and expected death benefit, many brokers may turn their nose up at a young, healthy person. After all, they hope to get a fast turnaround on their investments. This might sound a little harsh, but brokers are more often looking for older folks over 65 or people with chronic medical conditions. 

When you do find a broker or third party who’s willing to buy your policy, there are other fees to consider. For example, most brokers charge a commission fee of about 9%. Even though you hope to walk out of the office with full pockets, your final payout might be lower than you think. 

That makes finding an individual better for the seller. However, this might take much longer than working with a broker. Brokers are able to sift through a range of bids to get the best applicants for your policy. This is faster, but it might cost you more in the end. Weigh these pros and cons before choosing to sell. 

3. Familiarize yourself with state laws 

When you’re selling your life insurance policy, you want to ensure that government loopholes won’t come after you when you’re finished. Selling a life insurance policy will differ from state to state. Talking to a financial expert or a lawyer can help ensure you have all your ducks in a row to complete the sale. 

Investing in the help of a professional can also guarantee that you’re getting the most money for your policy. Too many people accept the first offer that comes around. Don’t be afraid to compare offers, negotiate, and rely on an expert for support. 

4. Sell your policy 

Selling your policy isn’t always easy. After comparing offers from multiple buyers, you’ll have to take income taxes into account when you want to start budgeting. Settling on your policy typically takes one of two forms: 

  • Borrowing: Borrowing money from your lender can allow you to keep your life insurance policy without selling it outright. This is a good option if your policy supplies tax-free funds.  
  • A cash surrender: Cash surrenders eliminate your claim on your policy in exchange for cash. This article has dealt with cash surrender options, in particular. 

Selling your policy for cash isn’t easy, but these tips can help you out. Don’t hesitate to reach out to a professional for more information regarding life insurance policies.