Is Selling Your Life Insurance a Good Idea?

Recently, I was sitting in our office waiting anxiously for our Keurig machine to do its job when I saw a commercial that piqued my interest. The commercial was about life insurance, but it wasn’t your typical sales pitch. It was a service touting the benefits of selling your life insurance for a profit.

Once I first heard of this possibility, I started seeing it everywhere – on TV, in magazines, and on blogs. From there, I started wondering: “Could it really be worth it to sell your life insurance policy to someone else? And, why on Earth would you want to do that anyway?”

It sounds crazy, and it is, but it could be a good option under the right circumstances. 

Why Should You Sell Your Life Insurance?

But, why would you want to sell your life insurance? And, why would someone want to buy it? Let me explain.

As we approach retirement, our views on life insurance tend to change. Kids are grown and gone or at least close to leaving the nest, your retirement account balances are likely as high as they’ve ever been, and your debt levels are as low as they’ve ever been. Obviously, this is a stark contrast from when you purchased life insurance in your 20’s or 30’s.  If you are like most retirees, you may not even need life insurance anymore.

So, what’s a retiree to do? Should you stop paying your premiums? Take any cash value you have and run?

While many do either of those, certain populations may actually be better off selling their policies to a group of investors. But, how does this work?

Here’s how it goes: If you choose to sell your policy, an investment group will take ownership of your life insurance policy, keep up the premium payments, and collect a benefit upon your death. In exchange for your policy and this agreement, you will receive a cash lump sum. 

Obviously, the investment group will want to look at your medical records in order to make an appropriate underwriting decision. Not to sound too morbid, but they will hope you’re dying soon so they can cash in. After the sale, the investment group will likely check in with you once per year to see if you are still alive. Hopefully they won’t sound too disappointed if you’re still kicking, but hey, you should prepare for that possibility.

The best part about this scheme is that the process is pretty seamless on your end. You’ll let them look at your medical records and answer any questions the investors have. From there, you’ll call your life insurance company and change your beneficiary to the company that purchased your policy. There’s usually only a few pages of paperwork to complete the process, and you may even be able to change your beneficiary online.  

How Much Can You Earn Selling Your Life Insurance?

Easy is good because nobody wants to go through a major inconvenience to sell their life insurance — especially when it’s easy as pie to just quit paying the premiums or take your cash value and run. Still, how much you could earn by selling your policy should definitely influence your decision.

Fortunately, there are a few generic formulas online you can use to figure this out. From what I gather, it appears you could expect between 13% and 25% of the face value of your policy when you sell. That’s up to $25,000 for a $100,000 policy, which isn’t chump change. If you have a large amount of cash value in the policy, that could also increase the sale price of the unwanted life insurance.

Now, $25,000 is likely not enough to change the scope of your retirement plans. However, if your health is deteriorating and you want to check a few items off the bucket list before the good Lord calls you home, then this exchange could be worth exploring further. Maybe you’re just so flush with cash that you are tired of paying your policy and know you won’t need it. That’s always a good thing, right? So, why not sell?

First, you’ll want to make sure you’re eligible. These deals are usually limited to policy owners ages 65 and older, but some companies only buy policies from people who are ages 70 and older. The worse your health is, the better chance you have of getting approved and receiving top dollar during the exchange.

Also, when it comes to selling your life insurance policy, it’s important to note that permanent life insurance policies like whole life, universal life, and all their cousins are eligible. Term life insurance is eligible if it is convertible term, meaning that for additional premium you can convert your term into permanent life insurance. Generally, policy face values must be over $100,000 to be considered.

Finally, you’ll want to have owned your policy for a few years before trying to sell. Keep in mind that states want to discourage the practice of buying life insurance simply for the purpose of selling it, and insurance is regulated on a state level. States like California, for example, require a two-year ownership value before being eligible for a sale.

Other Details to Be Aware Of When Selling Your Life Insurance

This brings up another important point I should mention: A life settlement is different from a viatical settlement. Viatical settlements are when terminally ill people with less than two years to live accept less than their policy face value to get the money now, where life settlements involve people ages 65 and older who might live quite a while.

Also consider how the proceeds of your life insurance sale will be taxed. For the most part, they’ll be taxed as a combination of ordinary income and capital gains. The capital gains portion represents the additional value from selling the policy versus simply cashing out the cash value of the policy. With this in mind, please remember that I am a financial planner and not a CPA or tax expert. If you’re considering this option, consult your tax planner or accountant to see how the taxes will shake out.

Finally, if you think selling your life insurance is a good fit for you, you’ll likely want to use a broker to be the middleman between you and a group of investors.  The broker will earn a commission for the sale of your policy. You’ll want to ask them to be transparent and disclose any conflicts of interest. (They won’t be acting as a fiduciary.)

The Bottom Line

This is all very uncomfortable. Someone is going to financially benefit from your death. Is that weird? I guess if you didn’t sell your life insurance policy, your family would eventually benefit financially from your death. Still, your family receiving cash when you die seems a lot different for more reasons than one. If it helps, no one investor would likely substantially benefit from any one death due to the nature of life settlements being bundled for proper portfolio diversification.

Should you think about selling your life insurance policy? I’m not totally convinced. When I first heard about this option, I was thinking I could tell some of my clients who could benefit if they unloaded a policy they’ve outgrown and no longer need. But, after doing my due diligence, I think this situation is likely beneficial in very rare cases. For example, if you are in your late 60’s or early 70’s and find out you’re not going to live that long, you might want to sell your policy and take a final trip to Hawaii. And, who could blame you?

 

Resources mentioned in the blog and accompanying podcast:

https://www.kitces.com/blog/life-settlements-selling-a-life-insurance-policy-thats-no-longer-wanted-for-more-than-its-cash-value/

https://www.kitces.com/blog/why-cancelling-an-existing-whole-life-or-universal-life-policy-may-be-a-bad-idea/

https://www.ovidlife.com/life-settlement-eligibility

https://www.gao.gov/products/GAO-10-775