Can You Sell Your Life Insurance Policy?

You can sell your life insurance policy for a cash payout. However, your beneficiaries will no longer get the death benefit if you pass away.

Advertising & Editorial DisclosureLast Updated: 12/22/2022
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If you feel that you no longer need life insurance coverage, you can sell your life insurance policy for cash. However, the payout is typically low and comes with high overhead costs. Additionally, selling your policy means your beneficiaries will get zero benefits when you pass away.

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How to Sell Your Life Insurance Policy

Life insurance provides a financial safety net for your dependents in the event of your passing. However, you may sell your life insurance policy to a third party if you no longer need coverage. The process involves finding a broker or a life settlement company that will connect you to interested buyers.

  • Life settlement: This term applies if you’re in good health and selling your life insurance policy for a cash payout.
  • Viatical settlement: If you have a terminal or chronic illness, your life insurance policy can be settled at a discount from its face value for a cash payout.

Once you’ve chosen a buyer, you must fill out the application form and provide the necessary documents. In return, the buyer will pay you the agreed-upon sum for your policy and take over the premium payments.

You can anticipate questions about your health when selling your life insurance policy. Unlike with a life insurance underwriter, you may receive a better offer with a settlement company if you are older or in poor health. That’s because the buyer gets the death benefit after you pass away.

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Most life insurance holders can only sell their life insurance policy when they are 65 years and older or if they are in poor health.

5 Tips for Selling Your Life Insurance Policy

Although selling your life insurance policy is possible, it can be challenging to find a broker or life settlement company that will offer you a great deal. MoneyGeek outlined five tips for selling your policy to help you maximize your cash payout and experience a successful transaction.

Key Takeaways

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You need to enlist the help of a broker or a settlement company to find a buyer for your life insurance policy.

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Buyers tend to prefer life insurance policies from policyholders aged 65 and above or those with a critical illness.

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When you sell your life insurance policy, your cash payout will fall between the death benefit and the cash value.

1. Do Your Research

Before selling your life insurance policy, it’s important to understand how it works, who can help you and what to expect. Make sure you know what type of life insurance you have to determine whether a life settlement can be an option. Generally, group life insurance, government-issued life insurance and employer-provided life insurance cannot be sold.

It’s also essential to understand the factors that can affect the offers you will receive, such as your policy’s cash value, premium amount, and life expectancy. Additionally, ensure you review the rules and regulations of life and viatical settlements in your state as this can make or break the transaction.

2. Complete Your Documents

When selling your life insurance policy, you need to gather the documents required to complete the sale. These include your life insurance policy documents and medical records. Buyers typically want to know the details of your insurance coverage and your health history and status to determine the value of your policy. As such, it’s vital to prepare all this information beforehand to save time later.

Make sure that your documents are complete and the information in your application is correct to avoid issues during the sale.

3. Get Professional Assistance

It’s often recommended to get professional assistance for significant financial decisions. A financial advisor can break down the pros and cons of a life settlement to help you determine if selling your policy is worth it. They can also assess the value of your life insurance policy.

To find the right financial advisor for your financial goal, you need to review their qualifications, experience and expertise. It’s also important to assess your compatibility — your financial advisor should be easy to talk to and someone you feel comfortable with.

4. Find a Reputable Broker

When looking for a reputable broker, it’s best to interview multiple candidates. Find out if they suit your needs by asking questions such as how their commission structure works and if they are licensed in the state.

Also, pay close attention to their transaction fees. According to the Financial Industry Regulatory Authority (FINRA), brokers and life settlement companies may take acommission as high as 30% from your payment. Check the company’s terms and conditions before signing any paperwork.

5. Shop Around

As a rule of thumb, don’t accept the first offer that comes your way. Offers tend to vary widely across settlement companies, so make sure to compare them before agreeing to sell your life insurance policy.

When shopping around, it’s valuable to know the present market value. But try to manage your expectations. You usually won’t get the face value of your life insurance policy. Instead, your cash payout may fall below the death benefit and above the cash value.

What Are the Pros & Cons of Selling Your Life Insurance Policy?

Before selling your life insurance policy for cash, talk to your family members and a certified financial advisor. Examining the benefits and drawbacks of a life settlement can also help you make a wise financial decision about your circumstances.

Pros of Selling Your Life Insurance Policy

The main benefit of selling your life insurance policy is to receive a cash payout. You can use the lump-sum payment for any financial purpose, like medical expenses or other unexpected costs. Furthermore, selling your policy means you’re no longer responsible for paying premiums.

Remember that these are applicable if you’re carrying permanent life insurance. But if you have term life insurance, it’s generally better to cancel your policy or let it lapse. That’s because term policies have no cash value, unlike permanent life insurance.

When looking for a settlement company, exercise caution; not all options are legitimate. It’s critical to research each company before entering a contract to avoid life insurance scams.

Selling your life insurance policy might be viable for certain financial situations. These include:

  • You can no longer afford to pay the premium: On average, term life insurance costs $3,011.16 per year for a 60-year-old. If your premium is too expensive to maintain, selling your life insurance policy may be a wise financial move.
  • You have no dependents relying on your income: It may be worth selling your policy if your beneficiaries are financially independent adults who don’t need the death benefit.
  • You have enough savings to self-insure: If you have assets that can adequately cover various expenses after your death, it may make sense to sell your policy and use the money for another purpose.

You may get a better offer if you are 65 or older. However, you need to be wary of brokers and settlement companies targeting your age group to do unlawful transactions. For example, they may offer you cash to apply for an insurance policy that pays out a third party.

Cons of Selling Your Life Insurance Policy

Although a life settlement can give you access to a lump sum of money, it has several pitfalls you need to be aware of. Selling your life insurance policy can be complicated and costly. Plus, it doesn’t always offer a valuable return.

Some of the drawbacks of selling your life insurance policy include:

  • Challenging sales process: Most buyers prefer policyholders with a short life expectancy to get their payout. If you are young or healthy, you may have difficulty finding an interested buyer.
  • Low returns: Payouts for a life settlement are often lower than the death benefit. These can range from 20– 25% on average of the policy’s face value.
  • Broker or settlement company fees: Brokers and settlement companies charge fees for helping you find a buyer for your life insurance policy.
  • Taxable sale: You may have to pay taxes on the proceeds you receive from the sale of your policy.

Note that your cash payout may disqualify you from getting public assistance. As always, it’s best to talk to a financial advisor before making a decision.

Alternatives to Selling Your Life Insurance Policy

Most people sell their life insurance policy due to expensive premiums or unexpected costs that need quick funding. However, there are ways to address these financial situations without having to go through the settlement process.

Consider the following options before selling your life insurance policy:

  • Use your cash value: If you have permanent life insurance, you can use your accumulated cash value to offset the cost of your premium.
  • Get a personal loan: Taking out a personal loan may be a better alternative if you need access to cash.
  • Take accelerated death benefits: If your policy has an accelerated death benefit provision, you may tap into your death benefit early to cover expenses.
  • Take a loan against the policy’s cash value: Your permanent life insurance may allow you to borrow money against the total value of your policy.
  • Exchange your policy: You can swap your life insurance policy for another without paying tax through a 1035 exchange.
  • Surrender your policy: Depending on your life insurance policy, you may surrender your coverage and receive some of your cash value as a payout.
  • Cancel your policy: You may cancel your term life insurance policy to cut your financial responsibility related to the account.

Additionally, you may explore various ways to lower your life insurance costs so you won’t have to sell your policy.

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Having seller’s remorse? You can reverse a life settlement and have your coverage reinstated. Consult with your state insurance department.

Frequently Asked Questions About Selling Your Life Insurance Policy

While a life or viatical settlement can give you instant cash, the process can be costly and difficult. Below, MoneyGeek answered some frequently asked questions about selling your life insurance policy to help you make a wise financial decision.

About the Author

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Mark Fitzpatrick is a senior content manager with MoneyGeek specializing in insurance. Mark has years of experience analyzing the insurance market and creating original research and content. He graduated from Boston College with a Bachelor of Arts and Johns Hopkins University with a Master of Arts.