Health & Life Insurance Actuaries | Lewis & Ellis Inc.

Pros and cons of selling a life insurance policy

Life Insurance and Annuities
by Tim DeMars
Learn more about sellling your life insurance policy.
Learn more about sellling your life insurance policy.

There are many factors to consider when selling your life insurance policy. Here are some of the most commonly asked questions, backed with insight designed to make your decision the right one.

How selling your life insurance policy works

There are several factors to consider when deciding whether to sell your universal life insurance policy. This choice is not for everyone but can bring many benefits to some.

First, let's get some context about selling an insurance policy. When a policy is sold by the owner, that's what is called a life settlement. The basic process is as follows:

  • Seek an interested broker: The policyholder, or seller, will share the details regarding their life insurance with an insurance broker so they can evaluate its sellability.
  • The policy is sold: The broker will then find someone who would be interested in buying the policy and the sale is made.
  • Costs are absolved: The person who sold the policy no longer has to pay premiums and receives a lump sum in return for their life insurance.

When the seller first speaks with the broker, they will be asked questions about their health and age. This helps the broker determine how much the policy is worth. According to PolicyGenius, it's more common for a purchase to be made from people who are older than 65.

Keep in mind that once you sell your policy, your beneficiaries will no longer receive a death benefit when you pass and your coverage is effectively over. When thinking about whether selling your policy is a good idea, consider your current financial strength and how much you need your life insurance coverage.

The cash benefits – and risks – of selling your life insurance policy

Why would someone want to sell their life insurance policy in the first place? Many people choose to do so because of the associated cash surrender value. If there is a sudden and unexpected need for liquidity, life insurance is sometimes the best option. Obviously, this is only a choice for those who have a valuable life insurance policy — only about 54% of Americans, according to LIMRA's 2020 Insurance Barometer Study.

The benefits

The main draw of selling a life insurance policy is the cash. This is especially true if the seller is unable to continue paying their premiums or if they don't want to pay cancellation fees. Be sure your beneficiaries will not need the death benefit and that you have enough saved up to pay for any unexpected loss.

Note that the person who is selling their life insurance is encouraged to have a policy with a death benefit of at least $100,000, but it is not necessary. However, it will pique the interest of potential buyers. The financial strength of the insurer is also taken into account by the buyer and has an impact on insurance sales.

Risks

Even though the cash settlement may be tempting, selling a life insurance policy is not the right choice for everyone. It can be hard to find the right buyer for your specific policy. Even with a broker to help you, it can be more of a hassle than it's worth. If you're strapped for cash, this may not be the most ideal way to get money. You won't get the full death benefit back, and, in fact, you're likely to lose most of it. In addition, you will have to pay the broker fees and taxes on the sale.

When to consider a life settlement

There are a couple of different ways to evaluate if selling your policy is the right thing to do. You could let the policy lapse or go with another liquidity option, like an investment account. If you no longer need your life insurance policy, it could be a good idea to sell it for a profit. This is especially true for those who need a large sum of money right away or who are having a hard time paying the premiums. Be sure to speak with your insurer if you're thinking about selling your life insurance policy; they can advise you on the best route.

How to optimize your current life insurance policy

If you can no longer pay for your life insurance premiums, there are other options you can seek before selling your policy. Your insurer can also help you adjust your policy so that it becomes more affordable for your current lifestyle. A good insurance agent and insurance company will be able to assist you in optimizing your policy so that it's ideal for both you and your beneficiaries.

When considering the best decision for you and your loved ones, changes to your life insurance policy should be well informed. Lewis & Ellis, Inc provides professional solutions specifically designed to take care of what matters most. Contact a Lewis & Ellis consultant today.

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