Why Sell Your Life Insurance Policy? Reasons & Options

Life insurance policies are purchased to provide security for loved ones. Life circumstances change, leading policyholders to re-evaluate coverage. A policy once a safeguard might no longer align with current needs or become a financial burden. Exploring options for an existing policy is common as personal and financial landscapes evolve.

Common Reasons for Selling a Life Insurance Policy

Personal circumstances shift from when a policy was purchased. Dependents may become financially independent, or the policyholder may no longer have an insurable interest in the beneficiary.

Financial hardship or an immediate need for liquidity is another reason. Unexpected medical expenses, retirement funding, or other urgent financial obligations create a need for cash. The policy’s cash value or death benefit can become an accessible asset.

Increasing premium costs can become an unsustainable financial burden as policyholders age. Premiums for some policies, especially those with increasing costs, can escalate beyond affordability. Discontinuing payments without recovering value can result in financial loss.

A life insurance policy may no longer align with updated financial or estate planning objectives. What was once suitable may no longer fit a revised financial strategy. This misalignment prompts re-evaluation of the policy’s role.

Individuals may also reallocate assets, investing the policy’s value in other financial instruments for potentially higher returns or better alignment with current strategies. This optimizes asset allocation for growth or diversification.

Available Options for Releasing Policy Value

A policy surrender is one method for accessing value in a permanent life insurance policy. This terminates the policy with the insurer. The policyholder receives the cash surrender value, which is the accumulated cash value minus any surrender charges or outstanding loans. This option is available for permanent policies like whole life or universal life, which build cash value.

A life settlement involves selling an existing policy to a third-party investor. The policyholder receives a cash sum greater than the cash surrender value but less than the full death benefit. These transactions involve older policyholders, often aged 65 or older, who own permanent policies they no longer need or can afford. The investor assumes responsibility for future premium payments and receives the death benefit upon the insured’s passing.

A viatical settlement is for policyholders facing a terminal or chronic illness. Unlike standard life settlements, viatical settlements are available to individuals with a life expectancy of two years or less, or those with a chronic illness requiring assistance with daily living. Due to the accelerated payout and the insured’s medical condition, viatical settlements result in a higher percentage of the death benefit compared to a standard life settlement.

Many policies offer an accelerated death benefit (ADB) rider. This provision allows a policyholder diagnosed with a terminal or chronic illness to access a portion of their policy’s death benefit while alive. Funds are paid directly by the insurer and can cover medical expenses, long-term care, or other financial needs. The remaining death benefit is paid to beneficiaries upon the insured’s death, reduced by the accelerated payment.

Important Financial and Practical Considerations

Several factors influence the value a policyholder receives when selling or surrendering a life insurance policy. Policy type, such as whole life or universal life, plays a role, as permanent policies accumulate cash value while term policies do not. The death benefit, existing cash value, insured’s age, and health status determine market value, especially in a life settlement. The premium structure and any outstanding loans against the policy also impact net proceeds.

Understanding tax implications of accessing policy value is important. If a policy is surrendered, any amount received exceeding total premiums paid is considered taxable income. For life settlements, proceeds may be subject to ordinary income tax and capital gains tax, depending on how the amount compares to the policy’s basis and cash surrender value. Consult a qualified tax professional to understand specific tax consequences based on individual circumstances.

A practical consideration is the impact on beneficiaries. Selling a life insurance policy means the original death benefit will no longer be available to beneficiaries. This can have implications for their financial security, especially if the policy was intended to provide income replacement, cover estate taxes, or fund future needs like education. Policyholders should weigh immediate financial gain against long-term financial support intended for loved ones.

Before selling, policyholders should explore alternatives that might better suit their needs. One option is taking a policy loan, where funds are borrowed against the policy’s cash value at competitive interest rates, while the policy remains in force. Another alternative is reducing the policy’s death benefit, which can lower premium payments while maintaining some coverage. Converting a policy to a paid-up status, where no further premiums are due but the death benefit is reduced, is an option for policies with sufficient cash value.