By Jim Miller
Dear Savvy Senior,
I have a life insurance policy that I’ve been paying on for years that I really don’t need any longer. I’ve heard that I can actually sell it for a nice payout. What can you tell me about this?
Interested In Selling
Selling a life insurance policy, even a term life policy that you don’t want or need any longer – a transaction known as a “life settlement” – has become a popular option among retirees in recent years who could use some extra cash. Here’s how it works.
A life settlement is the sale of an existing life insurance policy to a third party company for cash. Life settlements are typically best suited for people over age 65 who own a policy with a face value of $100,000 or more, or someone younger who has experienced a significant change in health.
Historically, if an owner of a life insurance policy decided they no longer needed it, they would either let the policy lapse or turn it in for a meager cash surrender value. But now, with the life settlement option, you can actually sell your policy for more than the cash surrender value would be, but less than its net death benefit.
Once you sell it, the life settlement company then becomes the new owner of the policy, pays the future premiums and collects the death benefit.
How much money you can expect to get with a life settlement will depend on your age, health and life expectancy, the type of insurance policy, the premium costs and the cash value of your policy. You may be able to receive four to eight times more than the policy cash surrender value.
If you’re interested in a life settlement, here are some things you should know:
Shop around: Because payout can vary, to ensure you get the best price for your policy get quotes from several companies. Also, find out what broker and transaction fees you’ll be required to pay. Coventry, the nation’s first and largest provider of life settlements, offers some of the highest cash payouts for life insurance policies. To get started, visit CoventryDirect.com or call 888-858-9344. To search for other providers or brokers, the Life Insurance Settlement Association provides a directory at LISA.org.
Be prudent: Life settlements are regulated in most states. Find out from your state insurance commissioner (see NAIC.org for contact information) if the life settlement company you’re interested in is properly licensed.
Protect your privacy: When you sell your life insurance policy, you will have to sign a waiver authorizing the release of medical and other personal information so that the buyer can determine how much to offer for your policy. Before accepting any offer, make sure that the company has procedures in place to protect the confidentiality of your information.
Understand the tax implications: The Tax Cuts and Jobs Act recently updated the tax treatment of a life settlement to be treated the same as the surrender of a policy back to the insurance company. This can be complicated, so be sure to consult a tax advisor.
If you want to keep your life insurance policy but could use some extra cash, you may have some other options. For example, some life settlement companies may allow you to keep part of the policy’s death benefit while eliminating your premium obligations. You can also ask your life insurer if you can borrow against your policy, or if you’re in poor health, see if you’re eligible for accelerated death benefits. You should also find out if you’re able to convert the cash value of your policy into an immediate annuity (through a 1035 Exchange), which would make regular payments to you for a set number of years or for the rest of your life.
Jim Miller is a contributor to the NBC Today show and author of “The Savvy Senior” book.