Understanding the Pros and Cons of Selling Your Life Insurance Policy

When considering the sale of your life insurance policy, it is essential to weigh the pros and cons of this decision. This article will explore the benefits and drawbacks of selling your life insurance policy, providing valuable insights that can help you make an informed decision.

Pros of Selling Your Life Insurance Policy

Immediate Cash: One of the most significant advantages of selling your life insurance policy is the quick financial relief it offers. If you are in urgent financial need, this option can provide a lump sum of cash to help you through a difficult time.

No More Premiums: Another pro is the cessation of monthly insurance costs. Once you have sold your policy, you are no longer required to make payments, which can provide significant financial relief.

Cons of Selling Your Life Insurance Policy

Lose Benefits: However, there are also significant drawbacks to consider. By selling your policy, you may lose the insurance coverage that you and your family have relied on for your future. This can be a difficult decision, as you might not be able to afford the premiums in the future, but you still want to ensure your family is financially protected.

Lower Payout: Furthermore, the amount of money you will receive from selling your policy may be less than the death benefit it offers. This can be a significant financial hit, especially if you have a highly valuable policy.

Tax Issues: Finally, selling your life insurance policy can lead to complex tax situations. These can be difficult to navigate, and it is essential to consult with a financial advisor to understand the implications fully. Each sale is unique, and the tax implications can vary significantly.

Valuing Your Life Insurance Policy

Once you've decided to sell your life insurance policy, determining its value is a crucial step. One of the most important decisions you need to make is who should bring your policy to the market. You can work with a direct buyer as seen on TV ads or with a life insurance broker. The choice depends on your goals, but if your aim is to get the highest offer possible, working with an experienced life insurance broker is highly recommended.

Experienced brokers have extensive contacts in the life settlement market and can secure competing bids from different buyers. They are also aligned with your interests and are paid on a commission-only basis. This ensures that your best interests are protected throughout the process.

What is a Life Insurance Settlement?

Selling a life insurance policy to a third-party investor is known as a life settlement. In return for selling your policy, you receive a lump-sum of cash. Some individuals choose alternative arrangements that allow them to "partner" with a buyer, continuing to receive the death benefit while keeping a portion of the policy and not paying further premiums.

While most people sell whole life policies, even term policies can have value. We help policyholders determine the secondary market value of the policies they want to sell. The value of a life insurance policy is expressed as a percentage of the face amount. For example, selling a $1,000,000 policy for 5% would net you $50,000, while a $3,000,000 policy could fetch $150,000 or more depending on the percentage and the policy's terms.

It is also important to consider health and the type of policy. Some policies may have no value in the secondary market due to their terms. Future premium payments are made by the new owner of the policy.

Determining the Value of Your Policy

For a potential buyer to determine the value of your policy, they need the following information:

Policy projections, including premiums to keep the policy in force to various ages The type of policy and its terms The life expectancy of the policy owner, determined by an independent third-party analyst (no medical exam required) A detailed history and understanding of the policy owner's current and past health

To facilitate this process, companies like Ted Bernstein Life Cycle Financial Planners can provide valuable assistance in determining the value of your policy and guiding you through the selling process.