Yes, you can sell your term life insurance policy, but it’s more complicated than selling other types of life insurance.
Your term life insurance policy doesn’t build up cash value like permanent policies do, but you can still sell it through something called a “life settlement.” Whether you can actually sell your policy depends on several important factors and what features your specific policy has.
What Is Selling Your Life Insurance Policy?
A life settlement lets you sell your existing life insurance policy to a third party, usually an investment company, in exchange for cash right now. When you sell your policy, the buyer becomes the new owner, pays the monthly premiums from then on, and gets the death benefit when you die.
Requirements for Selling Term Life Insurance
The most important thing to understand is that your term policy needs to be “convertible” to be worth much money. A convertible policy has a special feature called a conversion rider that lets you change your term policy into a permanent life insurance policy without taking a medical exam.
Convertible policies are much more valuable because buyers know they can convert them to permanent insurance if needed. These policies usually have time limits for conversion, typically before your term expires, and age limits of 65 to 70 years old. Non-convertible policies have very limited value in the settlement market, though some high-value policies might still find buyers in rare cases.
Beyond having the right type of policy, you need to meet certain personal requirements. Most companies want to buy policies from people who are at least 65 years old and have policies worth $100,000 or more. If you have health problems that might shorten your life expectancy, settlement companies will actually pay you more money because they won’t have to wait as long to collect the death benefit.
There’s also a special type of settlement called a viatical settlement for people who are terminally ill. Unlike regular life settlements, there’s no minimum age requirement if you’re facing a terminal illness.
How the Selling Process Works
The process starts with figuring out if your policy qualifies for sale. You can check your policy documents, call your insurance company, or contact a life settlement company to find out if your term policy can be converted to permanent insurance.
Once you know you’re eligible, you’ll work with a life settlement company to evaluate your policy. The company looks at several things including your age, health condition, the type of policy you have, how much the death benefit is worth, and what they think your life expectancy might be. Based on all this information, they’ll make you an offer.
You have different options for who to work with when selling your policy. Life settlement providers buy policies directly from you, while life settlement brokers shop your policy around to different buyers and take a commission of up to 30% of the sale price (but usually it’s significantly less). Full-service companies handle everything from start to finish.
The smart approach is to get offers from several different companies before deciding. Once you accept an offer, you’ll sign legal paperwork to transfer ownership and receive your cash payment.
Legal Rules and Regulations
Life settlements are completely legal and regulated by state governments across most of the country. Each state has its own rules, but generally, companies that buy life insurance policies must be licensed and follow strict guidelines.
Many states require a waiting period before you can sell your policy, usually anywhere from two to five years after you first bought it. However, most states make exceptions to this waiting period if you’re terminally ill, getting divorced, retiring, or facing disability.
The regulations are designed to protect consumers by requiring companies to give you detailed information about what you’re agreeing to, including how much brokers get paid and what alternatives you might have. States also require that you receive all offers and counteroffers, understand the tax consequences, and know how the sale might affect government benefits like Medicaid.
Money Matters
The amount you’ll get for your policy depends on your age, health, and the specifics of your policy. Generally, you’ll receive more than what the insurance company would pay you if you cancelled the policy but less than the full death benefit your family would get if you died.
However, selling your policy comes with tax consequences. You might have to pay income taxes on the money you receive, and the cash could make you ineligible for government assistance programs. The money also might not be protected from creditors who are trying to collect debts from you.
Other Options to Consider
Before you decide to sell your policy, think about other ways to reduce costs or get cash. Many insurance companies will let you lower your coverage amount, which reduces your monthly payments. If you have a convertible term policy, you might choose to convert just part of it to permanent insurance and let the rest expire.
Some policies come with accelerated death benefits, which let you collect part of your death benefit early if you’re diagnosed with a terminal illness. This might be better than selling your entire policy if you mainly need money for medical expenses.
If money is tight, you could also just stop paying premiums and let the policy end. You won’t get any money back, but you’ll eliminate the monthly expense entirely.
Important Things to Watch Out For
Since this involves a lot of money, it’s important to protect yourself from scams. Only work with licensed companies, and you can check their licenses through your state insurance department. Get multiple offers and don’t rush into any decisions.
Remember that once you sell your policy, your beneficiaries won’t get the death benefit when you die unless you leave them some of the money from the sale. Also, having sold a policy might make it harder or more expensive to get new life insurance coverage later.
Any company that buys your policy will have access to detailed information about your health and might require you to provide regular health updates. This personal information could be shared with other parties involved in the transaction.
Making the Right Decision
Selling a term life insurance policy can provide valuable cash when you need it, but it’s not right for everyone. The decision depends on whether your policy is convertible, your age and health, how much money you need, and what impact losing the death benefit would have on your family.
Take time to understand all your options and talk to a financial advisor before making this decision. While life settlements can help seniors who no longer need their life insurance coverage, they involve giving up important protections for your loved ones. Make sure the immediate cash benefit is worth more to you than the future security the policy provides to your family.