Should You Sell Your Life Insurance Policy?

You may have seen the ads on TV: an older couple happily discussing how they sold the life insurance policy they no longer needed for cash to help fund their retirement adventures. And you could sell yours, too, with the dual benefits of no longer having to pay premiums and getting cash for something you no longer have a use for. So should you sell your insurance policy?

It might be a good idea, depending on your circumstances. Let’s talk about how selling an insurance policy works, and what it might mean for you and your family. The companies that purchase life insurance policies are called “life settlement” companies. Like any business, life settlement companies are in business to make money. That doesn’t mean that you can’t benefit as well, but you should understand how life settlement operates before taking the plunge.

How Life Insurance and Life Settlement Work

Like many people, you may have bought life insurance when your family was young, in addition to creating an estate plan. If anything happened to you or your spouse, the life insurance benefit would have provided financial security for the children and the surviving spouse, perhaps even covering the cost of your children’s eventual college education, depending on how much coverage you had.

Of course, you weren’t planning to die, but wisely preparing for the unlikely possibility that you might. The insurance company, meanwhile, was gambling that you wouldn’t die—meaning that they could continue to collect your premiums without having to pay anything to your family.

Once your children are grown and self-supporting, you have a few options about what to do with your life insurance policy. You could simply stop making payments and let the policy lapse. You would no longer have the expense of those premiums, but you would get no benefit from the policy. You might be able to surrender your policy to the insurance company for whatever cash value had accumulated in the policy. Typically, though, this is not a lot of money. Or you could just keep paying the premiums.

Life settlement companies offer another option. They pay you a lump sum: more than you would get from surrendering the policy for its cash value, but less than the death benefit on the policy. Then the life settlement company keeps paying the premiums on the policy, and when you eventually shuffle off this mortal coil, they collect the death benefit.

To summarize, where the life insurance company was gambling that you wouldn’t die any time soon, the life settlement company is gambling that you will: the sooner you die, the fewer premiums they have to pay, and the sooner they make money off of their investment.

To summarize, where the life insurance company was gambling that you wouldn’t die any time soon, the life settlement company is gambling that you will: the sooner you die, the fewer premiums they have to pay, and the sooner they make money off of their investment.

How much could you make by selling your policy? In general, your policy is worth more to a life settlement company the older you are and the greater the amount of your death benefit. The idea of buying and selling life insurance policies may sound sketchy, but it is perfectly legal. A life insurance policy is an asset that can be sold to a third party. Your life insurance company may not like it, and may even try to talk you out of it. That’s because if you surrender your policy or let it lapse, they come out ahead: they’ve received years of premiums, but will never have to pay a death benefit. If a life settlement company takes over your policy, the life insurance company knows that eventually, they will have to pay. So they have an incentive to keep you from selling your policy.

How Should You Decide Whether or Not to Sell Your Life Insurance Policy?

Selling a life insurance policy to a life settlement company is not for everyone. Each case is different, and you should do a cost-benefit analysis, asking the following questions:

• Can you afford to keep making premium payments? If you can, is there someone close to you (say, grandchildren) whom you would like to see benefit from the policy when you die?
• How much is the life settlement company offering you, and how badly do you need the money?

Even if your children are grown and educated and your mortgage paid off, you may decide to keep making premium payments if it means that ultimately, your life insurance could benefit them and their children, or your surviving spouse. On the other hand, if you have no family that you want to receive the death benefit from your insurance, and making premium payments is burdensome, you might be better off taking the cash a life settlement company can offer you.

Before making a decision, consider consulting with an elder law attorney or financial planner to make sure you have considered all aspects of the transaction. We invite you to contact our law office to schedule a consultation.