How to sell your life insurance policy

Investing in life insurance is a good financial decision when you're younger: protecting your family is the most important thing you can do when you first have children. But now that you've retired, your situation has likely changed. Your kids are independent, your salary has been replaced by a mix of social security, pension payments, and drawing off of your retirement savings. If you are selling all or a portion of your business, you may even be overinsured.

The changing of financial circumstances is the reason why over half of seniors over 65 decide that their life insurance isn't needed anymore and surrender it back to the insurance company.  If they have an accumulated cash value in a permanent policy, most seniors with cash in their life insurance and walk away from it. In fact, over $100 billion dollars of life insurance value held by people over 65 is turned back over to the insurance companies every year.

But many people do not recognize that there are other options with an unwanted insurance policy. In many cases, selling a life insurance policy can net a significant amount more than the cash value of the policy - often 2-8 times the amount.

What's the difference between selling a life insurance policy and cashing it in?

Life insurance is considered your property - it's an asset you own, not dissimilar to your home. And just like your home, it can be sold to another party. When you sell your life insurance policy, it's transferred to the buyer (usually an institutional investor), which means the following:

  • The buyer will take on the responsibility of paying the premiums for the remainder of your life
  • The buyer becomes the primary beneficiary of the policy and receives the payout when you pass away
  • You will receive a lump-sum payment that's more than the surrender value but less than the total payout benefit

Cashing it the policy is different - cashing in the policy means that the insurance company does not have to pay out the benefit of the policy when you die - and you only get what you've accumulated as savings (if any) in the policy.

What types of life insurance policies can you sell?

In most cases, you should be able to sell any life insurance policy. However, you might not be clear on what type of policy you have and if there are other considerations.

Review these common types of life insurance and your options for leveraging them:

  • Term life insurance: This is a life insurance policy for a specific amount of time; for example, you may have a "20-year term policy. In order to sell a term policy, it will need to be converted to a permanent policy, which covers your life until you die.
  • Whole life insurance: Unlike a term policy, you will pay premiums on a whole life insurance policy until you pass away, or until you surrender it or lapse after your grace period.
  • Universal life insurance: This type of insurance is a types of whole life insurance where the cash value savings you put into the policy can be used to offset premiums (though when interest rates are low, your premiums may hike because the cash value is reduced)
  • Variable life insurance: Another type of whole life insurance policy, but instead of the cash value accumulated into a savings vehicle, it is invested in the stock market. If the market performs well, the cash value goes up, but in a down market - you lose.

There are a mix of other types of policies that are variations of the above. Most importantly, all of them can be sold. A buyer will make an offer to you based on how much your premiums will be, how long they'll have to pay those premiums (in other words, the amount of time you have left to live), how much they'll receive at the time of your death.

How to sell your life insurance policy

Because this isn't a well known option for most people, selling a life insurance policy can be a pretty daunting experience. There are several ways to go about it, all with pros and cons. Here are the most common things you can do to start the process.

Talk to your life insurance provider

A good place to start is with your insurance provider. While  insurance providers won't buy your policy, they can offer you alternatives to selling your policy, such as surrendering the policy, taking the cash value out of the policy, or using the cash value to pay your premiums, if that's an option. Insurance providers aren't a great place to go to get information about selling your policy, for good reason: if you simply surrender the policy, the insurance company gets to keep the premiums you paid into it for years, and they don't have to pay out the benefit when you die. 

Talk to your financial advisor

Your financial advisor may be a better place to start if you have one (and if you don't, it's worth it to pay for an independent financial advisor. We can help you find an independent financial advisor that focuses on post-retirement in your area). But even if you do have one, most financial advisors aren't familiar with this transaction, and often do not handle it themselves.

If you have a relationship with a bank, you might reach out to your banker or investment advisor to see if they know where to sell your life insurance policy.

Find a life settlement broker

As with most brokers, a life settlement broker doesn’t buy your life insurance policy. They do, however, have access to a network of potential buyer representatives (called "providers"). A broker might be able to get you multiple offers or find offers that you wouldn’t be able to find on your own.

Brokers also charge a commission - and they should. They are (in most states) legally required to represent your best interests and they put a lot of work into helping you get the best offer. But the commissions can be much higher than you're used to - up to 30% of the sale price of your life insurance policy. And even though (in most states) they are required to disclose the commission, they often make it hard for you to find or understand.

You want to read reviews for any broker you use. This will help you determine how reputable they are and whether they have connections that can help you.

Go direct to a life settlement provider

Selling directly to a provider is like selling your house directly to a buyer; you "cut out the middle-man." The difference here is that understanding the value of your insurance policy is much more complex than the value of your home. Providers represent buyers, who are obligated to try to get the best price for the life insurance policies they buy.

The advantage of going to a provider is that you may be able to get your payout faster (in a matter of days, not weeks), and you don't pay a commission. But some of the bigger or more disreputable providers will offer you a fraction of what the policy is actually worth.

As with brokers, read reviews before you interact with a life settlement provider. You’re taking a big hit on your death benefit, so make sure you work with the best providers.

Work with a referral agent (like Worthright)

At Worthright, we may not be a broker or provider, and we don't buy your policy directly. That means that everything we do for you is free. What we do is the following:

  • We get an understanding of why you want to sell the policy in the place
  • We appraise your policy so that you understand what it's worth before you sell it
  • Based on the needs of you and your family, we refer you to a reputable broker or provider who share our values
  • The broker or provider to whom we refer you will pay us, not you

As with any sale of property, make sure you're armed with all the information you need to make the sale. You don't want to leave money on the table. If you have any questions, don't hesitate to contact us and we'd be happy to help you think through the process.

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