Life insurance can be a smart way to ensure that you financially provide for beneficiaries in the event of your death. But if you’re overinsured, run into money troubles or don't have any survivors, you may decide to sell your life insurance policy and get cash from a third party. 

This third party will take on the policy, pay the premiums and receive the death benefit.

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However, selling life insurance can be financially and legally complicated, likely requiring you to work with a life settlement company/broker and possibly an attorney. 

Let’s look at what's involved in selling life insurance, the pros and cons and if there are better alternatives to consider.

Understanding life insurance policies

A life insurance policy is a vital part of your financial plan. Beyond helping your loved ones after you die, a policy can provide extra financial security during your lifetime.

There are two main types of life insurance: term life and permanent life. Permanent life insurance is in effect for your life. Term life insurance lasts for a predetermined period, such as 20 or 30 years, and is the most common and least expensive.

"Term is primarily used to cover short-term liabilities and to make sure a large debt like a mortgage is paid off in the event of an unexpected death or that there is enough money for the survivors to live on," explains Lamar Brabham, CEO/founder of Noel Taylor Agency, a financial services firm in North Myrtle Beach, SC.

The two most common permanent life insurance policies are:

  • Whole life -- Whole life has a set death benefit, premium, interest rate and builds cash value, which you can tap into while you’re alive.
  • Universal life -- Universal life is typically designed to accumulate cash value. You can structure a universal life policy to last your entire life, regardless of how long you live.

"Universal life policies combine features of term life and whole life and offer flexible premiums," says Edward Stone, a Greenwich, CT-based attorney who specializes in insurance law. "Universal policies can be indexed to a market, like the S&P 500, in which case they are sold through broker-dealers. Most of the secondary market traffics in universal life policies, which have an investment component built-in that allows for policy values to increase over time based on premiums paid and interest credited to the policy."

Commonly, when you apply for life insurance, you go through an underwriting process to determine how much coverage you can purchase and at what price.

"After the premium for the coverage is paid, the insurance company will issue the policy. After that, if you pass away, the insurance will pay the person or persons named as beneficiaries of the death benefit of the policy," adds Brabham.

How to sell a life insurance policy

You may be able to sell your life insurance policy to an investor or third party. This process is called a life settlement. 

In a life settlement, the average payout varies between 10% and 50%, based on policy fine print, your life expectancy, your age and other factors.

Most life insurance policies can be sold with the help of an attorney or a life settlement provider company/broker who can quote you a price for your policy.

"Brokers get multiple bids on a policy to get the best sale price, while providers are purchasers of the life settlements," says Joseph Gibbons, owner of Gibbons Solutions in Midlothian, TX. "If you use a broker, you'll need to wait for potential buyers. If you receive an offer, you can sell your policy. You will then make the buyer the new policy owner and they will start paying your premiums."

This kind of transaction is called a viatical settlement.

"This is when a policyholder sells their policy to a third party for more than the cash value of the policy but less than the death benefit. The money above the cash value is subject to capital gains. The purchaser of the policy gets the death benefit from the policy upon the death of the original owner," notes Brabham.

Why would you sell a life insurance policy?

There are many reasons why selling a life insurance policy can make sense.

"Needing access to cash is often the driving force. It can be due to the high cost of medical treatment, existing debt that needs to be repaid or even the wish to take a bucket list trip in your senior years," says Brabham.

Another reason you might want to unload your policy is if you have a serious medical condition and need money while you’re alive. Other rationales for selling include the policy being unneeded, unwanted or no longer affordable. You may even have multiple policies and find that you don’t need that much coverage. 

"Selling a policy can be an alternative for someone who does not just want to surrender it or let it lapse. Selling enables the consumer to harvest some of the value in the policy rather than just letting it expire," says M. Bryan Freeman, founder/president of Atlanta-based Habersham Funding, LLC.

Eligibility to sell a life insurance policy

Before you can sell your life insurance policy, you have to find out if you qualify.

"Usually, people 65 or older can sell their life insurance policy as long as it exceeds $200,000," cautions Gibbons.

Stone says there are life settlement laws in most states that set requirements for all transactions sold on the secondary market, where most life insurance sales occur.

Most life insurance policy types qualify to be sold -- including whole life and universal life.

"But in some cases, a policy must be converted or split to sell it on the secondary market," Freeman says.

Can you sell a term life insurance policy?

Term life insurance policies are eligible to be sold for cash. But they have to be converted to a permanent life insurance policy first, Gibbons says.

Many term life policies have riders that allow the policyholder to convert to a permanent life policy later. 

Once it's converted, a life settlement provider will provide a quote after factoring in the type of policy, death benefit, premiums, your health and your age.

When does selling life insurance make sense?

One advantage of selling a life insurance policy is that you can get money while you’re alive. 

"You can receive an immediate lump sum that is usually larger than the surrender value of your policy. You will no longer have to make premium payments, which can start to become too expensive. You will have more money to enjoy your retirement, and the money that you were putting toward premiums can be used for other things," says Gibbons.

For those who paid a lot into a policy and who experience a change in medical condition, "there could be significant value in selling a policy that's no longer needed," Stone suggests.

Of course, the major drawback to selling your policy is that your beneficiaries will no longer receive anything upon your demise.

In addition, "a majority of the life settlement will be tax-free, but portions of it might be taxed," warns Gibbons. "If you sell, you may become ineligible for Medicaid, as well, as Medicaid recipients cannot have more than $2,000 in assets."

Alternatives to selling your life insurance policy

Selling a life insurance policy isn't your only option. Instead, experts recommend considering several contingency plans.

"Take advantage of the accelerated death benefit if you put that in place when structuring the policy. Or borrow against the policy's cash value, depending on how much is built up. Or, stop payments to receive the policy surrender value," Givens recommends.

Another possible option is splitting the policy, so that part of it can be retained for payout upon your death and the other part can be settled now for cash, advises Freeman.

Alternatively, consider a home equity loan or other type of short-term borrowing vehicle.

"Even with a relatively high-interest rate on that loan, you could net more cash at the end of the day," Brabham says.