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Can I sell my life insurance policy?

Do you prefer to learn by watching? We answer this question in a video below. Click here to jump ahead.

If you own something, typically you can sell it. A life insurance policy is another asset you can sell if you own it. There’s more than one option though, other than just selling your life insurance policy, if you’re in need of cash. The reason why you need the money will influence which choice is best. Today we’ll explain your options for selling (or not selling) your life insurance policy and help you decide which route to take.

If you own a life insurance policy and are in need of cash, here are five options that may be available to you:

  1. Sell your life insurance policy for a viatical settlement
  2. Sell your life insurance policy for a life settlement
  3. Accelerate a portion of your policy’s death benefit
  4. Take out a loan against the policy’s cash value
  5. Surrender the policy to the insurance company for its cash value.

The availability of these options is based on the type of the policy you have and your specific situation.

» Compare: Term life insurance quotes

Selling Your Life Insurance Policy for a Viatical Settlement

If you are terminally or chronically ill, you can sell your life insurance policy for cash to a viatical settlement company. Individuals who do this normally want money to help finance health care.

A viatical settlement company buys the life insurance policy for a lump sum. The company then owns the policy, pays the premiums, and collects the full death benefit when you die.

The National Association of Insurance Commissioners (NAIC) has set minimum limits as to what a viatical settlement company can offer a terminally or chronically ill person for their policy. An individual with less than six months to live receives at least 80 percent of the policy’s death benefit. An individual with two years left to live receives at least 60 percent.

Many insurance companies have added accelerated death benefit provisions to their products so terminally ill individuals are not forced to sell their policies in this manner. We’ll discuss these accelerated benefits later in this post.

Pros:

  • No longer responsible for paying policy premiums
  • Receive a relatively substantial payout compared to surrendering policy to insurance company
  • Can use money however you wish
  • Viatical companies are regulated by the NAIC

Cons:

  • Only available if your life expectancy has severely diminished or are chronically ill
  • Beneficiaries no longer receive the death benefit
  • Life insurance coverage is still active on you so option later on to purchase more coverage on yourself is limited

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Selling Your Life Insurance Policy for a Life Settlement

In addition to viatical settlement companies, there is a market to purchase policies that owners simply don’t want to keep paying for. In this case, the purchaser offers more than what the life insurance policy’s cash surrender is worth but less than its death benefit. The purchaser pays the premiums and collects the full death benefit when you die. This sale is called a life settlement.

Most states require policyowners to wait at least two years before they can obtain a life settlement. The life settlement provider must also be licensed in the same state that the current policyowner resides.

Pros:

  • No longer responsible for paying policy premiums
  • Receive a relatively substantial payout compared to surrendering policy to insurance company
  • Can use the money however you wish

Cons:

  • Beneficiaries no longer receive the death benefit
  • Life insurance coverage is still active on you so option later on to purchase more coverage on yourself is limited
  • May need to shop around or work with a life settlement broker to ensure you get a fair price

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If you have a life insurance policy and are in need of cash for an emergency or a once-in-a-lifetime opportunity, you have some options.

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Accelerating Your Life Insurance Policy’s Death Benefit

Most insurance companies include what is called an accelerated death benefit rider on their policies. With this rider, the policyowner can withdraw a portion of the policy’s death benefit to use however they wish. By going this route, you’re able to receive cash, still continue to own your life insurance policy, and leave money for your beneficiaries.

These benefits are also known as living benefits since the insured is still alive when the policyowner withdraws the portion of the death benefit. In order to accelerate these benefits, the insured individual must have a medical condition that shortens life expectancy, a year or less to live is the typical requirement.

The amount you withdraw is subtracted from the total death benefit amount the policy’s beneficiary receives upon the death of the insured.

For example:

John Smith is the policyowner of his own $500,000 life insurance policy. He is diagnosed with cancer and his doctor tells him he has about six months left to live. John contacts his insurance company and withdraws $100,000 to pay for experimental drug treatments. The death benefit his policy’s beneficiaries receive is now $400,000 instead of $500,000.

These benefits were created in the 1980s when the AIDS epidemic was forcing many policyowners to sell their policies to viatical settlement companies. Life insurance companies wanted to offer policyowners a different option.

Pros:

  • Available on both term and permanent life insurance policies
  • Dealing only with the life insurance company
  • You still own policy and have control of it
  • Beneficiaries can still receive portion of the death benefit
  • Can use the money however you wish

Cons:

  • Only available if your life expectancy has severely diminished
  • Still required to pay your policy’s premiums if you want to keep policy active
  • Reduces your beneficiary’s death benefit proceeds

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» Calculate: Life insurance needs calculator

Taking Out a Loan Against Your Life Insurance Policy

If you have a permanent life insurance policy, such as a whole life insurance policy, you may have the option to take out a loan against your policy’s cash value. This is not an option for you if you own a term life insurance policy because term policies do not accumulate cash value.

If you own a policy with a cash value, request a loan in the amount of cash you need from the insurance company and they will send you a check. This loan not does require a credit check nor does the IRS recognize it as income so it’s tax-free.

However, the loan does accrue interest. While you do not need to pay it back, if the loan amount plus interest ever exceeds your policy’s cash value then your life insurance policy will be terminated. If the total amount of premiums you’ve paid up until the termination is less than the loan balance you owe, then you may receive a tax bill from the IRS on the difference.

If you own a participating whole life insurance policy—this is when you receive dividends based on the insurance company’s favorable investments—a policy loan will affect the dividends you receive. When you take out a loan against your policy, the insurance company is loaning you money from their account and your cash value is used as collateral. This means the insurance company has less money to invest. To balance this, most insurance companies reduce your dividends while you have an active loan out.

If you do not pay the loan back before your death, the amount plus interest is deducted from your beneficiary’s death benefit total. Interest is always accruing so it’s in your beneficiary’s best interest if you pay back the loan in a timely manner.

Pros:

  • Dealing only with the life insurance company
  • Loan is confidential (does not show up on credit report)
  • Loan is tax-free
  • Loan does not have to be paid back while you’re alive
  • You still own the policy and have control of it
  • Beneficiaries still receive policy’s death benefit (minus loan + interest if not paid back)
  • Can use the money however you wish

Cons:

  • Still required to pay your policy’s premiums if you want to keep policy active
  • Loan accrues compounding interest
  • Loan might reduce dividends gained if you have a participating policy
  • Reduces how much your beneficiaries receive if loan is not paid back
  • May cause policy to terminate if aggregate loans and interest exceed cash value
  • You may get a tax bill if the policy terminates as a result of not paying the loan back

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Surrendering Your Life Insurance Policy for Cash

If you’re in need of cash, you may have the option to surrender (or cancel) your life insurance policy in exchange for its cash value. (Note: this option is for permanent life insurance policies only since term life insurance policies do not accumulate cash values.) Many insurance companies do not grant cash surrenders until after a certain number of years have passed, typically three years.

Depending on how long your policy has been active, there may or not may be a surrender fee. If the cash surrender value is more than the total amount of premiums you’ve paid, the difference is considered income and taxed. Also, if you have a policy loan balance, this amount will first be deducted from the cash value. If you go this route, your coverage is canceled and the insurance company no longer has any obligation to you.

If the protection value from your life insurance policy is no longer relevant, perhaps your children are grown and financially independent, then surrendering your policy may be a good option. If the policy has been inforce for many years, the cash value amount could be significant. It’s not uncommon for people in their retirement years to surrender their policies for the cash value.

Pros:

  • Dealing only with the life insurance company
  • No longer responsible for paying policy premiums
  • Can use the money however you wish

Cons:

  • You only get cash tax-free up to the aggregate amount of premium paid
  • Beneficiaries no longer receive death benefit

As you can see, if you have a life insurance policy and are in need of cash for an emergency or a once-in-a-lifetime opportunity, you have some options. Talk to your agent before making a decision if you’re unsure of the best option for your situation. If you’re considering surrendering the policy or taking out a policy loan, talking to your tax accountant is also advisable.

If you purchased life insurance through Quotacy, contact us at any time with questions regarding your policy. Your Quotacy agent is here to help you now and in the future with all your policy service needs.

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Watch the Selling My Life Insurance Policy Video

Video Transcript

Welcome to Quotacy’s Q&A Friday where we answer your life insurance questions. Quotacy is an online life insurance broker where you can get life insurance on your terms.

I’m Jeanna and I’m Natasha.

Today’s question is:
 
Can I sell my life insurance policy?

 
 
Depending on the type of life insurance you own, there may be a few options for you to consider. These options include selling your policy for a viatical settlement, selling your policy for a life settlement, accelerating a portion of your policy’s death benefit, taking out a loan against your policy’s cash value, and surrendering your policy for its cash value.

Options for Selling Your Policy:

  • Viatical Settlement
  • Life Settlement
  • Accelerating Your Death Benefit
  • Taking out a Policy Loan
  • Surrendering for Cash Value

 
 
Today, Jeanna and I will go over the requirements of each option and their pros and cons.

Viatical Settlements

You can sell your life insurance policy for cash to a viatical settlement company if you are terminally or chronically ill. A viatical settlement company pays you a lump sum worth 60 – 80% of the death benefit and then they become the owner of the policy. They pay the remaining premiums and collect the full death benefit from the insurance company when you die.

The positives of going with a viatical settlement are that you no longer are responsible for paying the premiums, you receive a relatively substantial sum, you can use the money however you wish, and the viatical companies are regulated by the National Association of Insurance Commissioners.

Pros of Viatical Settlements

  • No longer need to pay policy premiums
  • Receive a relatively substantial payout
  • Can use money however you wish
  • Viatical companies are regulated by the NAIC

 
 
A viatical settlement option is only available to you if your life expectancy has severely diminished. Your intended beneficiaries also now no longer receive a death benefit. And since the policy is still active on you, just no longer owned by you, if you wanted to later on purchase more life insurance you would be limited as to how much coverage you could buy.

Cons of Viatical Settlements

  • Only available if your life expectancy has severely diminished or you are chronically ill
  • Your beneficiaries will no longer receives the death benefit from the policy
  • Your ability to buy life insurance later is limited

 
 

Life Settlements

In addition to viatical settlement companies there are life settlement providers out there that buy life insurance policies from people who just simply don’t want to own them anymore.

You do not need to be dying to sell your policy for a life settlement. With a life settlement, the buyer pays more than the policy’s cash surrender value but less than the death benefit. The buyer owns the policy, pays the remaining premiums, and collects the full death benefit when you die.

The positives to a life settlement are similar to that of a viatical settlement. You’re no longer responsible for paying the premiums, you receive a relatively substantial sum, and you can use the money however you want.

Pros of Life Settlements

  • You don’t need to be dying in order to sell the policy
  • No longer responsible for paying policy premiums
  • You receive a relatively substantial payout
  • You can use this money however you wish

 
 
Most states require policyowners to wait at least two years before they can sell a policy for a life settlement. You may also want to shop around or work with a life settlement broker to ensure you receive a fair price.

And similar to the negatives of a viatical settlement, your intended beneficiaries no longer receive the death benefit. You are also limited to future amounts of life insurance coverage you can purchase on yourself.

Cons of Life Settlements

  • Need to wait a few years before you can sell
  • Beneficiaries no longer receive the death benefit
  • Potential to buy life insurance coverage later on is limited
  • May need to shop around or work with a life settlement broker to ensure you get a fair price

 
 

Accelerated Death Benefits

In the 80s, life insurance companies created living benefits so that terminally ill policyowners would not be forced to sell their life insurance policies if they needed money. These living benefits are provided by accelerated death benefit riders.

Most insurance companies include an accelerated death benefit rider on their life insurance policies for no charge. With this rider, a terminally ill policyowner can withdraw a portion of their policy’s death benefit to use however they wish.

The positives of going with an accelerated death benefit option include the fact that you are only dealing with the insurance company versus a third party. You still own the policy and have control over it. Your beneficiaries can still receive any remaining death benefit when you die, and this option is available for both permanent and term life insurance policies.

Pros of Accelerated Death Benefits

  • Available on term and permanent life insurance
  • Dealing only with the life insurance company
  • You still own policy and have control of it
  • Beneficiaries still get a portion of the death benefit
  • Can use the money however you wish

 
 
Unfortunately, the option to accelerate the death benefit is only available if your life expectancy has severely diminished. Since you still own the policy you are required to keep paying the premiums if you want to keep the policy active. And the amount you accelerate and use is subtracted from the proceeds your beneficiaries will ultimately receive.

Cons of Accelerated Death Benefits

  • Only available if your life expectancy has severely diminished
  • Need to keep paying premiums
  • Reduces your beneficiary’s death benefit proceeds

 
 

Policy Loans

If you own a life insurance policy that accumulates cash value, such as a whole life insurance policy, you have the option of taking out loans against it. As with any other loan, the balance accumulates interest until it’s completely paid back. You are not required to pay back the loan while you are alive but, if you don’t, whatever balance remains plus the interest will be taken from your beneficiary’s death benefit.

You need to be careful if you take out policy loans. If the loan amount plus interest ever exceeds your policy’s cash value, your policy will terminate. And if the total amount of premiums you’ve paid is less than the loan balance at termination, then you may receive a tax bill from the IRS on the difference.

The positives to taking out a policy loan include the fact that you’re only dealing with the insurance company, the loan is also confidential and won’t show up on your credit report, and the loan is tax free unless the termination issue comes up. You’re still in control of the policy and your beneficiaries still receive a death benefit if you die pending your loan plus interest doesn’t eliminate it.

Pros of Policy Loans

  • Dealing only with the life insurance company
  • Confidential, tax-free, and does not have to be paid back while you’re alive
  • You still own and control your policy
  • Beneficiaries still receive death benefit (minus loan amount + interest if not paid back)
  • You can use the money however you wish

 
 
You still need to keep paying your policy premiums if you want to keep your policy active. And if you have a participating whole life insurance policy the loan might reduce the dividends you can gain.

Life insurance policy loans can be beneficial if you’re in need of quick cash but you need to be vigilant in monitoring the interest so that your beneficiaries aren’t left with the tax bill. Or pay back the loan while you’re alive as soon as you are able to.

Cons of Policy Loans

  • Need to keep paying premiums on your policy
  • Loans accrue compounding interest
  • Loan might reduce dividends depending on policy
  • Reduces death benefit if loan is not paid back
  • Policy ends if loans + interest exceed cash value
  • Tax bill if the policy ends due to now paying back loan

 
 

Surrendering a Policy

If you own a permanent life insurance policy, you have the option of surrendering the policy for its value. This option is not available to term life insurance policyowners.

The benefits of this option include the fact that you’re only dealing with the insurance company and you’d no longer be responsible for paying the premiums. And you can use the cash however you wish.

Pros of Surrendering a Policy

  • Dealing only with the life insurance company
  • No longer responsible for paying policy premiums
  • Can use the money however you wish

 
 
It’s important to note that many insurance companies do not grant cash surrenders until after a certain number of years have passed, typically three. Also, there may be a surrender fee depending on how long you’ve had the policy. The longer you’ve owned the policy, the lower the fee amount. If you have a policy loan out, this amount plus interest will first be deducted from the surrender value before you receive it. And if the surrender value is more than the total amount premiums you’ve paid so far, the difference is considered income and taxed.

Cons of Surrendering a Policy

  • May need to pay a surrender fee depending on how long policy has been active
  • Only tax-free up to the aggregate amount of premiums paid
  • Beneficiaries no longer receive death benefit

 
 
A policy surrender can be a good option if you no longer need life insurance. For example, if you’re comfortably retired and your children are grown and financially independent, then surrendering the policy for its value may be a nice supplement to your retirement funds.

It’s advisable that you talk to your agent if you’re considering one of these options. Depending on your particular situation one option may be much more suitable than another.

If you have any questions about life insurance, make sure to leave us a comment. If you’re ready to get quotes, check out Quotacy.com. We’re here to help you find the best deal on the life insurance you want.

» Compare: Term life insurance quotes

 

About the writer

Headshot of Natasha Cornelius, a life insurance writer, for Quotacy, Inc.

Natasha Cornelius

Writer, Editor, and Co-Host of Quotacy’s Q&A Friday YouTube Series

Natasha writes and edits content and is co-host of Quotacy’s YouTube series. She is also working toward her Chartered Life Underwriter (CLU) designation. When not working or studying, you’ll find her throwing a tennis ball for her pitbull mix, Emmett, or curled up on her couch watching Netflix. If it’s football season, the Packers game will be on.