Most people buy term life insurance to ensure their loved ones are financially protected in the event of an unexpected death. But what happens when the original reason for coverage no longer exists, or worse: the premiums become unaffordable? You might wonder if you can sell your term life insurance policy and receive some financial benefit while you’re still alive.
This guide will explore the process of selling a term life insurance policy, including eligibility requirements, how the sale works, what alternatives exist, and what to consider financially and legally. Understanding your options can help you make informed choices that align with your financial goals.
Key Takeaways
- Can you sell a term life insurance policy? Yes, you can sell a term life insurance policy, but it must meet certain eligibility criteria, such as being active and convertible.
- How does selling a term policy differ from selling a permanent policy? Selling a term policy is different from selling a whole or universal life policy since term policies usually do not have a cash value component.
- Why might a term policy not qualify for a life settlement? Policies that are not convertible or have already expired cannot be sold through a life settlement.
Understanding Eligibility for Selling a Term Life Insurance Policy
Not all term life insurance policies qualify for sale. Understanding what makes a policy eligible is the first step in determining whether this path is right for you.
Eligibility for Selling
To be eligible for sale, a term life insurance policy must be active. Policies that have lapsed, expired, or been fully paid out cannot be sold. In most cases, the policy must also include a conversion rider that allows it to be turned into a permanent policy. Converting the term policy into a permanent policy gives it more value to buyers. Since permanent policies don’t have an expiration date, like term policies do, they offer more investment flexibility for investors.
Learn more about how these transactions work in our guide to life settlements.
Influencing Factors
Several personal and policy-specific factors can affect your eligibility and the potential payout you receive. These include:
- The face value of the policy
- The number of years remaining on the term
- The policyholder’s age and current health condition
Policies owned by individuals over the age of 65 or those with serious health conditions are generally more attractive to buyers because the policy may pay out sooner.
A Detailed Look at Conversion Riders
Making sure your term life insurance policy has a conversion rider is key to determining whether it may be eligible to sell in a life settlement. This rider allows you to convert your term policy into a permanent one, which is an important factor in making it marketable for life settlement buyers. Without the ability to convert your policy from term to a permanent policy, your policy may not be valuable in the life settlement market.
Conversion Rider Definition
A conversion rider is an optional feature that lets you convert your existing term life insurance policy into a permanent policy, such as whole or universal life. This is typically done without a medical exam, making it easier for older individuals or those with health issues to maintain coverage.
In the life settlement market, a term policy that is converted into a permanent policy becomes eligible for sale to third-party buyers.
Age Limits and Policy Conversion
Most insurance companies require policyholders to convert their term policy before a specific age, usually between 65 and 70. If you wait too long, the conversion rider may expire, making the policy unsellable.
It is important to check your policy documents or contact your insurer to understand your conversion deadline.
Non-Convertible and Annual Renewable Term (ART) Policies
Policies without a conversion option are generally not eligible for sale. However, in some cases, annual renewable term (ART) policies or even non-convertible term policies may still qualify under specific conditions, such as if they were recently active or part of a group plan.
Consulting with a life settlement professional can help determine whether your specific policy has market potential.
Exploring Alternatives to Selling Your Term Life Policy
Before moving forward with a life settlement, you should consider every option available. Here are some alternative ideas that might better meet your financial needs.
Accelerated Death Benefit Rider
Many term policies include an accelerated death benefit rider. This allows policyholders who are terminally ill to access a portion of the policy’s death benefit while still alive. The funds can be used to pay for medical treatment, long-term care, or personal expenses.
While this rider does not involve selling the policy, it does draw funds from your death benefit in order to offer you immediate financial assistance. That means your beneficiaries receive a lower payout upon your passing.
One final note as you explore this option: make sure to evaluate if there are any fees upon use. Some insurance carriers charge an administrative fee if you decide to use your accelerated death benefit rider.
Long-Term Care Riders
Some term policies also offer long-term care riders, which allow policyholders to access the death benefit if they require extended care due to a chronic illness or disability. These riders are especially valuable for those who wish to remain in their homes or avoid burdening family members with daily care responsibilities.
Similar to accelerated death benefit riders, long-term care riders also cut into the death benefit amount to provide you with immediate cash.
Free Eligibility Checks
Before committing to a sale, it is a good idea to get a free eligibility check. This can help you determine whether your policy qualifies for a life settlement and what it might be worth.
Learn more about the life settlement process here.
Steps Involved in Selling a Term Life Insurance Policy
Selling a term life insurance policy involves several steps that range from simple to somewhat complex. The process can take anywhere from a few weeks to a few months, depending on the complexity of your policy and the evaluation required.
Evaluation
The first step is a thorough evaluation of your policy. Buyers or brokers assess its value based on the face amount, years remaining on the term, your age, and your health condition. Medical records may be requested to determine your life expectancy.
Reviewing the Offer
Once the evaluation is complete, you will receive an offer from a life settlement provider or broker. This offer reflects the current market value of your policy. It is important to review the terms carefully and compare offers if multiple buyers are interested.
Acceptance
If you decide the offer is acceptable, you will formally agree to the terms. This often includes signing documents that transfer ownership of the policy to the buyer.
Closing
During closing, all legal and financial paperwork is finalized. The buyer assumes responsibility for future premium payments and becomes the beneficiary of the policy.
Funds Disbursement
Once the sale is finalized, the agreed-upon funds are disbursed to you. This is typically done through a wire transfer or check and may take several business days to complete.
Financial Implications and Considerations
Selling a life insurance policy can provide significant funds, but there are important financial considerations to weigh before moving forward.
Fees and Costs Involved
There may be administrative or transaction fees associated with the sale, especially if you work with a broker. Additionally, the buyer may request updated medical records, and the underwriting costs can sometimes be passed on to the seller.
Be sure to ask for a breakdown of all fees in advance so you are not caught off guard by unexpected costs.
Tax Considerations
The proceeds from a life settlement may be subject to taxation. If the payout exceeds the total amount of premiums you have paid into the policy, the excess up to the cash surrender value is considered taxable income. Any proceeds from the life settlement above and beyond the cash surrender value amount is taxed as capital gains.
Consulting with a tax advisor can help you understand how the sale will affect your taxes and whether you can reduce your liability.
Impact on Beneficiaries
One of the most important things to understand is how selling your policy affects your beneficiaries.
Change in Ownership and Beneficiary Rights
When you sell a policy, ownership is transferred to the buyer. This includes the right to receive the death benefit when you pass away. As a result, your original beneficiaries will no longer receive any payout from the policy.
It is essential to discuss this impact with your loved ones and weigh whether the immediate financial benefit is worth the long-term change in beneficiary arrangements.
Understanding the Life Settlement Market
The life settlement industry includes several key players, each with different roles in the process. Understanding how the market works can help you navigate it more effectively.
Life Settlement Companies
Life settlement companies work with institutional investors to buy policies. They handle the paperwork, underwriting, and closing process. These companies often work directly with sellers or through brokers.
Life Settlement Brokers
Brokers act as intermediaries who market your policy to multiple buyers. Their goal is to get the highest possible offer for your policy. Brokers earn a commission from the sale, typically between 10 and 30 percent of the settlement amount.
Working with a broker can increase competition and improve your payout, but it also means additional fees.
Life Settlement Providers
Providers are companies that purchase policies directly from sellers. They are often licensed and regulated by state insurance departments. These buyers assume all future obligations for the policy.
If your policy is already converted to a permanent plan, a provider may be your most direct route to completing a sale.
Market Conditions
The life settlement market is influenced by factors like interest rates, investor demand, and the performance of alternative investments. These conditions can affect the value of your policy at the time of sale.
If possible, consult with a financial advisor to determine whether market conditions are currently favorable for selling.
Use of Proceeds from Selling a Term Life Policy
Once you receive funds from the sale, you are able to use the money any way you’d like. The best use of your newfound funds will depend on your personal financial goals and needs.
Living Expenses
The funds can be used to cover everyday expenses such as rent, utilities, groceries, or transportation.
Retirement Savings
You may also choose to invest the money to supplement your retirement savings or create a more secure financial future.
Medical Bills
Many policyholders use life settlement proceeds to pay down medical debt or fund necessary treatments that may not be covered by insurance.
Long-Term Care Costs
Selling your policy can help pay for nursing care, in-home care, or assisted living. These costs can be substantial, and using your life settlement funds to cover them may improve your quality of life.
The Role of Third-Party Professionals
Professional guidance can help you make informed decisions during the life settlement process.
Tax Consultants
A tax consultant can help you evaluate the tax impact of your policy sale and determine whether any deductions or strategies are available to minimize your liability.
Financial Advisors
A financial advisor can help you assess whether selling your policy fits within your overall financial plan. They can also help you explore alternative strategies if a sale is not the best option.
Conclusion
Selling a term life insurance policy is a complex decision that depends on eligibility, financial needs, market conditions, and personal goals. While not all term policies qualify, those with conversion riders and active coverage may offer valuable opportunities through a life settlement.
Before moving forward, it is important to evaluate all alternatives, understand the impact on your beneficiaries, and consult with professionals who can guide you through the process.
If you are considering selling your policy, start by checking your eligibility. You can begin the process by visiting our get started page and taking the first step toward a more flexible financial future.
