Selling Life Insurance To Yourself: Is It Possible?

Life insurance policies are usually sold to a third party when they are no longer needed or the premiums are unaffordable. The sale of a life insurance policy is a complex process with potential legal and financial implications. It is important to understand the different options available and the impact of the sale on the policy beneficiaries.

You can sell your life insurance policy if you're over 65 or terminally ill

Yes, you can sell your life insurance policy if you're over 65 or terminally ill. In fact, these are the two most common scenarios in which people choose to sell their life insurance.

Over 65

If you're over 65, you can sell your life insurance policy in what's known as a life settlement. This is when you sell your policy to a third party for a cash amount before the policy matures. You'll usually get a payout that's greater than the policy's cash surrender value but less than the total death benefit.

Terminally Ill

If you have a terminal illness, you can sell your life insurance policy to an investor with a life settlement. This means you'll receive a living benefit instead of waiting to pass away and leave a death benefit. If you're terminally ill, you're likely to get a significant portion of your death benefit in a life settlement.

Things to Consider

If you're thinking of selling your life insurance policy, it's important to keep a few things in mind. Firstly, selling your policy means your beneficiaries will no longer receive a death benefit. Secondly, there may be tax implications when you sell your policy. Finally, make sure to shop around for the best deal and consider using a broker to get the highest possible offer.

You can sell both term and permanent life insurance policies

Term Life Insurance Policies

• Term life insurance is designed to provide a death benefit to the policyowner if the insured passes away within a specified timeframe. It is often called "temporary insurance" because it meets a temporary need, such as ensuring that a mortgage can be paid off or children's education will be funded if the primary earner passes away before retirement.
• Term life insurance policies typically have lower premiums than whole life insurance policies with the same death benefit amount. However, term life policies do not build cash value, so they cannot be cashed out.
• To sell a term life insurance policy, it is important to determine if the policy is convertible to a whole life policy. This can be done by adding a conversion rider, which allows the policyowner to convert the term policy to a whole life policy before the policy expires and before a certain age, usually 65 or 70.
• The health and age of the insured can significantly impact the settlement offers for term life insurance policies. Generally, younger and healthier individuals may receive smaller payouts, while older and less healthy individuals may receive higher offers.
• When selling a term life insurance policy, it is advisable to have the policy appraised by a life settlement company, who will evaluate the policy's value based on factors such as the policy's face value, the policyholder's age and health, premium payments, and remaining term.

Permanent Life Insurance Policies

• Permanent life insurance, including whole and universal life insurance, is often more attractive to buyers in the secondary market because of its guaranteed benefits and longer coverage duration.
• Permanent life insurance policies build cash value over time, which can be withdrawn or borrowed against. This cash value component is a significant advantage over term life insurance policies, which do not have this feature.
• When selling a permanent life insurance policy, it is important to review the type of policy, the coverage amount, the policy's cash value, and any other details that could impact its marketability. Understanding your state's regulations and waiting periods for selling life insurance is also crucial.
• Similar to selling term life insurance, it is recommended to consider hiring an independent advisor or a reputable, licensed broker to help navigate the process and maximize the payout.
• Selling permanent life insurance can provide immediate cash flow and relief from premium payments. However, it is important to consider the long-term impact, as beneficiaries will no longer receive a death benefit once the policy is sold.

Life settlement companies are licensed buyers of life insurance policies

In the US, life settlement companies must be licensed by the relevant state insurance department. For example, in Texas, companies must be licensed by the Texas Department of Insurance, and their licenses can be checked by calling 800-252-3439.

It is important to research the purchasers of life settlements to see if they are regulated and licensed. While the majority of US states regulate life settlements, not all life settlement transactions are regulated.

When deciding which life settlement company to sell to, it is recommended to compare quotes from multiple companies to get the best price for your policy. It is also important to only work with reputable companies that are licensed in your state.

You may have to pay taxes on the money from the sale

When selling your life insurance policy, it's important to be aware of the potential tax implications. The money you receive from the sale can be taxed in different ways, depending on the type of settlement you choose and your specific circumstances. Here are some key points to consider:

Viatical Settlement:

If you are terminally ill, the money you receive from a viatical settlement is generally tax-free. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) ensures that individuals facing serious health issues can access these funds without tax concerns.

Life Settlement:

On the other hand, if you opt for a life settlement, the tax rules are a bit more complex. The portion of the sale amount that is equal to what you've paid in premiums (your "cost basis") is typically not taxed. However, any amount that exceeds your cost basis but is less than the cash value of the policy may be subject to income tax. Additionally, any amount that surpasses the cash value of the policy may be subject to capital gains tax.

Estate Tax Impact:

Selling your life insurance policy can also have implications for your estate taxes. When you sell the policy, you transfer ownership rights. If this transfer occurs at least three years before your death, the policy is not included in your estate, potentially reducing the value of your taxable estate. This could, in turn, lower the tax burden for your heirs.

Tax Considerations for Beneficiaries:

While beneficiaries generally don't need to pay taxes on their life insurance payout, there are a few circumstances where the money may be taxable. If the death benefit is paid out in installments and accrues interest, that interest is typically subject to tax. Additionally, if the money is paid to the insured's estate rather than a specific beneficiary, it could be taxable. Finally, if the owner of the policy is different from the insured, the payout to the beneficiary may be considered a taxable gift.

Tax Planning:

Given the complexities of tax laws and their applicability to life insurance sales and payouts, it is always advisable to consult a qualified tax professional. They can guide you through the specific rules and regulations and help you make informed decisions to minimize your tax liability.

The sale could disqualify you from certain benefits

The sale of your life insurance policy could have a significant impact on your eligibility for certain benefits and financial assistance programs. Here are four to six paragraphs discussing this in detail:

The proceeds from selling your life insurance policy may affect your eligibility for Medicaid and other needs-based government assistance programs. The lump-sum payout could push you above the income and asset limits for these programs, leading to potential disqualification. This is an important consideration if you rely on these benefits to meet your essential needs.

The extra income from the sale could also impact your tax obligations. A portion of the settlement may be considered taxable income, and the amount and tax rates will vary depending on the settlement size, the premiums you have paid, and the policy's cash value. It is crucial to consult a tax professional to understand the specific tax consequences of selling your policy.

Additionally, the sale of your life insurance policy could have implications for your estate planning. The proceeds from the sale could reduce the value of your taxable estate, which may lower the tax burden for your heirs. However, it is essential to consider the impact on your overall estate plan and how it may affect the distribution of assets and financial support for your loved ones.

Selling your life insurance policy also means that your beneficiaries will not receive the death benefit when you pass away. This could leave them with reduced financial security and struggle to meet specific financial needs, such as mortgage or funeral expenses. Therefore, it is essential to consider the needs of your beneficiaries and whether they rely on the life insurance payout before deciding to sell your policy.

Overall, the sale of your life insurance policy can have far-reaching consequences that extend beyond the immediate financial gain. It is crucial to carefully weigh the benefits against the potential disadvantages and explore alternative options before making a decision. Consulting with a financial advisor or estate planning attorney can help you understand the full implications of selling your life insurance policy and make an informed decision that aligns with your financial goals and needs.

Frequently asked questions