One of the benefits of a life insurance policy is that as long as you make your premium payments, it is effective for the term of your policy (for term life insurance) or for your entire life (for whole life insurance). However, at some point you may find that you no longer want or need your policy. Should this occur, you have the option to sell your life insurance policy.
You can either sell it directly to a buyer (directly or through a broker) or to a settlement company that specializes in purchasing life insurance policies. When selling life insurance policy, the buyer becomes your policy's new owner. Upon your death, the buyer will receive the policy's payout. Here are three things you need to know about selling your insurance policy.
1. The Price You Can Receive Varies Significantly Based on Your Health and Your Policy
There isn't an exact formula to determine how much you will receive if you decide to sell your policy. Instead, your price varies based on multiple factors.
Individuals in poor health generally receive more money. If you are nearing the end of your expected life span or if you have a terminal illness, this will help you command a higher price for your policy. Your buyer likely won't have to wait as long to receive a payout.
Though good health is priceless, it can actually hurt you if you are selling your life insurance policy. It will take longer for your buyer to benefit from the policy, so the price you receive for your policy will be lower.
Other details that influence the price of your policy include the cost of your policy's premiums, your policy's death payout, and whether or not your policy has any cash value.
2. Cash from Selling Your Life Insurance Policy is Taxable Income
Though the death payout for a life insurance policy is usually non-taxable, you lose this benefit when you sell your policy. Unfortunately, the money that you receive when you sell your life insurance policy is usually taxable because it is considered income. Be prepared for income taxes to reduce your net payout.
An increase in your taxable income can also affect your eligibility for public assistance, such as food stamps or welfare.
3. It Pays to Shop Around (Literally)
One of the easiest ways to get top price for your life insurance policy is to shop your policy around with multiple buyers or brokers. Don't settle on the first offer you receive. If possible, avoid selling your policy to a settlement company that specializes in purchasing policies. You will generally receive more money by selling it to an individual.