How To Monetize Your Term Life Insurance Policy

Yes, you can sell your term life insurance policy for cash, but there are several factors to consider. First, you'll need to determine if your policy is convertible to a whole life insurance policy, which can be done by checking if you have a conversion rider. Your health, age, and the specifics of your policy, such as its value and term length, will also impact your ability to sell and the offers you receive. It's important to note that selling your policy will result in the loss of the death benefit for your family and may have tax implications.

Life insurance settlements: the process of selling your term life insurance policy to third-party buyers

Selling your term life insurance policy can be a great way to get rid of coverage you no longer need or can no longer afford. It is your personal property, and you can sell it just like anything else you own. However, there are some important considerations to keep in mind.

First, make sure you are dealing with a licensed life settlement company. These companies buy life insurance policies and must be licensed with the relevant state insurance department. It is important to beware of scams and check the company's license before proceeding.

The value of your policy will depend on several factors, including your age, health, and the policy's value. Life settlement companies are typically interested in buying high-value policies from older policyholders. You may need to be over a certain age, and have a policy with a minimum value, to sell your policy. The company will take over your policy and pay the premiums, but your family will not receive the life insurance benefits.

To sell your policy, you can either find a broker or go through an online provider marketplace. It is important to select a reputable broker who will offer a fair price. You will need to complete an application and provide information about your policy and health. The broker or provider will then evaluate your policy and make an offer. If you accept the offer, you will sign over ownership and receive payment.

Before selling your policy, it is important to review the terms and monetary value of your policy. If your policy is convertible, you may want to consider converting it to a whole life policy to increase its value. You should also consult with professionals, such as a life settlement broker or financial advisor, to understand the potential tax and financial implications of selling your policy.

Selling your term life insurance policy can provide immediate cash and relieve you from premium payments. However, it is important to weigh the pros and cons before making a decision. Your family will no longer receive the death benefit, and there may be tax consequences and impacts on your eligibility for certain public assistance programs.

Life settlement companies: companies that buy life insurance policies and must be licensed

Life settlement companies are licensed companies that buy life insurance policies. They are also known as life settlement providers. These companies purchase active life insurance policies from older adults, offering cash settlements to secure the death benefit rights to the policies. The companies then become the beneficiaries of the policies and are responsible for paying the premiums.

In the US, life settlement companies must be licensed. For example, in Texas, life settlement companies must be licensed with the Texas Department of Insurance. It is recommended that you check a company's license before proceeding with a life settlement transaction, as with any financial transaction, there is a risk of scams.

Some of the top life settlement companies in the industry include Coventry, Abacus Life Settlements, Magna Life Settlements, and Q Capital Strategies. These companies stand out for their strong reputation, fast sales process, excellent educational resources, and commitment to innovation, respectively.

When choosing a life settlement company, it is important to compare quotes from multiple companies to get the best price for your policy. Additionally, it is recommended to only work with reputable companies that are licensed in your state. You can verify a company's license by checking with your state insurance commissioner.

By selling your life insurance policy to a life settlement company, you can receive a cash settlement, but it is important to carefully consider the impacts on your finances and your survivors before proceeding.

Conversion riders: allow you to convert a term life policy into a whole life policy

When signing up for term life insurance, you may be asked if you want to add a conversion rider. This rider allows you to convert a term life policy into a whole life policy. Typically, you must exercise your conversion privilege before the policy expires and before you turn 65 or 70.

If you added a conversion rider, it will be specified in your policy with complete details on how and when you can convert from term to permanent insurance. If you’re unsure after reading your policy, a life settlement provider can review it with you and help determine if it is convertible.

These riders may come at an extra cost, but in exchange for the increased cost, you gain the ability to reclaim some of the value through a settlement or by carrying the policy through the remainder of your life.

Purchase of Term Life Insurance Policy: The policyholder initially purchases a term life insurance policy with a term conversion rider. This term life policy provides coverage for a predetermined period, such as 10, 20, or 30 years. It is important to verify if your term life insurance policy is convertible, as not all policies have this option available.

Decision to Convert: At some point during the term, the policyholder decides to convert their policy. This decision might be prompted by various factors, such as changes in their health status, financial situation, or personal circumstances. It's important to note that there's typically a deadline for converting policies, which may require conversion to occur before the term policy expires or before the policyholder reaches a certain age.

No Additional Medical Underwriting: The key advantage of a term conversion rider is that the policyholder doesn't need to undergo additional medical and underwriting processes at the time of conversion. Even if your health has worsened since the initial purchase of the policy, you can still convert to a permanent policy without your health status influencing the premium rates.

Conversion to Permanent Policy: The term policy is converted into a permanent life insurance policy, such as whole life or universal life insurance. These types of policies offer lifelong coverage and can also build cash value over time. When considering converting your policy, it's important to remember that the terms and conditions can vary. Some policies may allow for partial conversions, meaning that only a portion of the term coverage is converted while the rest remains as a term policy.

Adjustment of Premiums: After the conversion, the policyholder's premiums generally increase. This is because permanent life insurance is more expensive than term life insurance due to the lifelong coverage and cash value component.

Continued Coverage: The policyholder now continues their coverage under the new permanent life insurance policy, with the policy's death benefit remaining in force as long as they continue to pay the premiums.

It's important to note that the specifics of these riders can vary widely depending on the insurance company and the specific policy terms and conditions. Always review the policy's details and consult with an insurance professional to fully understand the benefits, limitations, and costs.

Viatical settlements: tax-free settlements for those with a terminal illness and a life expectancy of less than 24 months

A viatical settlement is a financial transaction that allows individuals with terminal illnesses to sell their life insurance policies to a third party for a lump sum cash payment. This cash can be used to cover medical expenses, living costs, or other urgent financial needs. In most cases, the funds received in a viatical settlement are tax-free.

Eligibility Criteria

To qualify for a viatical settlement, you must meet the following criteria:

• Terminal Illness Diagnosis: Most providers define this as a condition that is expected to result in a life expectancy of two years or less. Medical conditions qualifying for viatical settlements include advanced-stage cancer, heart disease, and other life-threatening conditions.
• Life Insurance Policy Type: Permanent life insurance policies, such as whole life or universal life, are generally preferred. While term life insurance policies may also qualify, it often depends on specific circumstances, such as the remaining term and health condition of the insured. Convertible term policies are more likely to be accepted than non-convertible policies.
• Policy Ownership: You must be the owner of the life insurance policy you wish to sell. If the policy is part of a trust or owned by someone else, the owner will need to be involved in the sale process and eventually sign over ownership and beneficiary rights to the buyer.
• Policy Age: In most cases, a policy must have been in force for a minimum of two years prior to a sale. Some states require that the policy has been in force for up to five years.
• Health Status and Life Expectancy: Your health is a critical factor in determining eligibility. Life settlement buyers will evaluate your medical records and consider your estimated life expectancy. A shorter life expectancy will often result in a higher settlement offer.

The Viatical Settlement Process

Once you determine your eligibility for a viatical settlement, you can follow these steps:

• Assessment of Eligibility: Contact a viatical settlement company to discuss your situation. They will review your health status, policy details, and other relevant factors to assess your eligibility.
• Medical Underwriting: After confirming potential eligibility, the company will obtain your medical records so that buyers can determine your health status.
• Valuation of the Policy: Potential purchasers will calculate the present value of your life insurance policy based on factors like your age, health condition, policy type, and current market conditions. This valuation will help determine the offer you will receive.
• Offers: You will receive offers from interested buyers, which you can compare to choose the one that best meets your financial needs.
• Finalizing the Settlement: After accepting an offer, you will complete the necessary paperwork to finalize the policy sale. This involves signing a viatical settlement contract and documents to transfer the ownership and beneficiary rights for your policy to the life settlement purchaser. Upon completion, you will receive your lump sum payment, and the buyer will take over responsibility for the policy and future premium payments.

Tax Implications of Viatical Settlements

Viatical settlements are generally not taxable, thanks to the Health Insurance Portability and Accountability Act (HIPAA) of 1996, which made them tax-exempt. Before this law, viatical settlement proceeds were considered taxable income. However, there are exceptions. The IRS imposes a list of conditions on tax-free viatical settlements, which must be met by both the seller and the purchaser.

Additionally, state tax laws vary, and while many states follow federal taxation guidelines, some may have different regulations. Therefore, it is essential to consult with a qualified tax advisor to understand the specific tax implications of your viatical settlement.

Tax considerations: proceeds from selling your life insurance policy may be taxed as ordinary income or capital gains

When selling your term life insurance policy, it's important to be aware of the potential tax implications. The proceeds from the sale may be taxed as ordinary income or capital gains, and you should consult a tax advisor or financial professional for personalised guidance. Here are some key considerations:

Taxable Amount:

The amount of tax you may have to pay depends on the difference between the sale price and your tax basis in the policy. Your tax basis is generally the total amount of premiums you have paid over the life of the policy. If you sell the policy for more than your tax basis, the gain may be subject to taxation.

Ordinary Income Tax:

The portion of the sale proceeds that exceed your tax basis but is less than the policy's cash surrender value may be taxed as ordinary income. This means it will be taxed at your marginal tax rate, which varies depending on your overall income and tax bracket.

Capital Gains Tax:

Any sale proceeds that exceed the policy's cash surrender value will likely be taxed as capital gains. Capital gains tax rates are typically lower than ordinary income tax rates.

Viatical Settlements:

If you sell your life insurance policy while terminally or chronically ill, the transaction may qualify as a tax-free viatical settlement. A "terminally ill individual" is typically defined as someone with a life expectancy of 24 months or less, while a "chronically ill individual" is someone who is unable to perform at least two activities of daily living without substantial assistance.

Tax Planning:

To make informed decisions about selling your term life insurance policy, it is highly recommended that you consult with a tax professional. They can help you understand the specific tax consequences, including any exemptions or deductions, and advise you on strategies to minimise your tax liability.

Frequently asked questions