What you should know about life settlements

If you no longer need life insurance, a life settlement can offer a larger payout than a policy surrender. But be wary of pushy sales tactics, broker fees and tax implications.

What are life settlements?

A life settlement is the sale of your life insurance policy to a third-party investor for an upfront one-time payment. This payment is typically more than the policy’s cash surrender value but less than the death benefit.

After paying a lump sum for the policy, the third-party buyer becomes the policy beneficiary and agrees to pay the policy’s premiums for as long as you live. When you die, they receive the policy’s death benefit.

When should I sell my life insurance policy?

There are circumstances that may warrant a life settlement. Here are the most common reasons for selling a life insurance policy:

• You can’t afford the premiums. If you can’t cover the expense of life insurance premiums, you can opt for a life settlement instead of letting your coverage lapse.
• You don’t need the coverage. If your life circumstances change and you no longer need coverage, a life settlement may offer a bigger payout than the cash surrender value of the policy.
• You need the money. While there are many alternatives for accessing personal capital, a life settlement may help you pay for medical bills or other upfront expenses.

How life settlements work

Here’s what to expect from the life settlement process:

1. Explore policy regulations. Both state laws and provider guidelines govern the sale of life insurance policies. You may need to wait between two to five years before you can sell your policy, so speak to your provider or an independent advisor before you begin the process.
2. Have your policy appraised. Find out how much your policy is worth. Life settlement brokers may offer to appraise your policy for free but will likely expect you to use their brokerage services.
3. Find a provider. If you’re looking to bypass brokerage fees, you can find a buyer on your own. Or, opt for a life settlement provider to guide you through the process and connect you with potential buyers.
4. Verify credentials. If you choose to work with a life settlement provider or independent broker, call your state insurance department to make sure they’re licensed.
5. Shop for the best offer. Don’t rush the process or accept the first offer you receive. Wait for a competitive offer before you sell.

How much will I make in a life settlement?

According to a study published by the US Government Accountability Office in 2010, policyholders who underwent the life settlement process typically received 13% to 21% of their policy’s value. A London Business School study in 2014 suggested that Americans can expect to be offered more than four times their policy’s cash surrender value in a life settlement.

Typically, the older you are, the more you can sell your policy for — that’s because your life expectancy is lower. Unlike your insurance company, a buyer is invested in you dying sooner. But, ultimately how much you receive in exchange for your life insurance policy hinges on a number of factors, including the value of the policy, the cost of premiums and your life expectancy.

Drawbacks of selling your life insurance policy

Before you sell, consider the following:

• Brokerage fees. The Government Accountability Office quoted brokerage commission fees at 9% in 2009.
• Taxes. Your life settlement may be considered taxable income and be subject to capital gains taxes.
• Expensive future premiums. If you decide you’d like a life insurance policy in the future, your age and health status may result in steeper premiums.
• Benefit eligibility. The income from your life insurance settlement could disqualify you from Medicaid or other government programs.

Life settlement tax laws for 2020

In 2017, the Tax Cuts and Job Act (TCJA) was revised to make it easier and more appealing for seniors to sell their life insurance policies rather than surrendering them.

Previously, policyholders who wanted to sell their policies were required to reduce their tax basis. This meant they had to deduct expenses relating to the “cost of insurance” over the life of the policy.

Under the new law, policyholders don’t need to do that. Instead, the same tax rules apply to both life settlements and surrenders, so sellers pay less capital gains tax overall.

What life settlement alternatives are there?

If you need money but want to keep your life insurance policy, consider these life settlement alternatives before you make a decision:

• Borrow against your policy. If you’re in need of cash and have whole life insurance, you could tap into the cash value of your policy, but this will reduce the death benefit.
• Accelerated death benefit. In the event of a qualifying terminal, chronic or critical illness, some policies offer an accelerated death benefit rider to access cash ahead of schedule.
• Convert the policy. If the ongoing cost of coverage is an issue, consider converting your policy or changing your coverage to reduce premiums.
• Surrender your policy. You can surrender your policy directly to your provider for the accumulated cash value of the policy.

Compare life insurance companies

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Name	Product	Issue age	Minimum Coverage	Maximum Coverage	Term Lengths	Medical Exam Required
Bestow		18 - 60 years old	$50,000	$1,500,000	10, 15, 20, 25, 30 years	No	Get a quote in less than 10 minutes with on-the-spot approval and no medical exam.	Go to site More Info	Compare	loading Fetching your data...
Haven Life		18 - 64 years old	$100,000	$3,000,000	10, 15, 20, or 30 years	No exams for some applicants	Fill out a quick online application and get approval in minutes with up to $3 million in coverage.	Go to site More Info	Compare	loading Fetching your data...
Sproutt		18 - 100 years old	$50,000	$10,000,000	5, 10, 15, 20, 25 and 30 years	No	Compare 40+ insurers and apply online to get the lowest possible price — no medical exam required.	Go to site More Info	Compare	loading Fetching your data...
Ladder		20 - 60 years old	$100,000	$8,000,000	10, 15, 20, 25 or 30 years	Depends on policy	Apply for term life insurance online without the medical exam. Get an instant decision and adjust your coverage at no charge.	Go to site More Info	Compare	loading Fetching your data...
Policygenius		18 - 85 years old	$50,000	$10,000,000	10, 15, 20, 25, 30 years	Depends on provider and policy	Compare 12+ top insurers side-by-side to get the best possible deal, and shop return of premium policies online.	Go to site More Info	Compare	loading Fetching your data...
Nationwide life insurance		40 - 95 years old	$10,000	$1,000,000	10, 15, 20 and 30 years	Yes	Get term, whole, universal or no-exam life insurance with up to $1 million in coverage.	Go to site More Info	Compare	loading Fetching your data...
Fabric		21 - 60 years old	$100,000	$5,000,000	10, 15, or 20 years	Depends on policy	No-exam term policies up to $1 million online, with the option to upgrade to permanent life insurance later.	Go to site More Info	Compare	loading Fetching your data...

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Bottom line

There are many factors to consider before you sell your life insurance policy, including broker credentials, tax implications and potential fees.

Research your life insurance options before you sell to ensure you make a well-informed decision for your future.

Frequently asked questions

• Who qualifies for a life settlement?

  Many life settlement providers require sellers to be at least 65 years old with a whole or universal life policy of $100,000 or more.

• What is the life settlement waiting period?

  It’s the state mandated amount of time you have to wait before you can sell your policy, and typically varies between two to five years.

• Which states have no life settlement regulations?

  As of 2018, Alabama, Missouri, South Carolina, South Dakota and Wyoming have no state regulations that govern life settlements.

• How can I get the most for my life insurance policy?

  The two factors that impact the sale price of a life insurance policy are the policy’s value and the age of the policyholder. Generally, the older you are — the larger your death benefit, the more an investor is willing to pay.