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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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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 Fridays

Natasha is the content manager and editor for Quotacy. She has been in the life insurance industry since 2010 and has been making life insurance easier to understand with her writing since 2014. When not at work, she's probably studying and working toward her Chartered Life Underwriter (CLU) designation while 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. Connect with her on LinkedIn.