Universal Life Insurance: Can You Sell Your Policy?

Universal life insurance is a popular form of permanent life insurance that can accumulate cash value over time and also provide a death benefit to your beneficiaries. If your universal life insurance policy no longer serves its intended purpose, you may be able to sell it for cash through a life settlement. This transaction makes it possible for seniors to get cash for life insurance policies they no longer want or need. The process of selling a life insurance policy begins with finding an interested buyer, meeting the basic qualifications, and then discussing your options with a licensed provider.

Understanding the process of selling universal life insurance

Selling universal life insurance is a transaction known as a life settlement. Seniors can sell their life insurance policies for cash if they no longer want or need them. This type of insurance is a popular form of permanent life insurance that can accumulate cash value over time and provide a death benefit to beneficiaries.

Finding out if you prequalify for a life settlement:

Most policies that qualify for a life settlement are universal life insurance policies, but other types of policies, such as whole life insurance, can also qualify. To prequalify, you generally need to meet certain criteria, such as being 65 years old or older, experiencing a change in health since purchasing the policy, and owning a policy worth $100,000 or more.

Completing your qualification:

Once you prequalify, a life settlement expert will gather additional information about you and your policy. They will contact your life insurance carrier and healthcare provider to obtain the necessary details. This step helps ensure that the highest possible offer can be made for your policy.

Accepting your offer and receiving your life settlement payout:

The life settlement expert will finish gathering all the necessary information to complete your policy appraisal and make you an offer to purchase your policy. You are not obligated to accept the offer, and you may continue paying to maintain the policy if you prefer. If you accept the offer, the sale of your universal life insurance policy will be finalized, and you will receive a large cash payout.

Additional Considerations:

It is important to note that selling your life insurance policy has certain implications. For example, your beneficiaries will no longer receive the death benefit associated with the policy. There may also be potential tax liabilities, and selling your policy may affect your eligibility for financial assistance programs like Medicaid. Therefore, it is recommended to consult with a financial advisor or tax expert before making a decision.

Additionally, you have the option to use a life settlement broker, who can help you find the best offer by comparing bids from different life settlement providers. However, brokers typically charge a commission for their services, which can be a significant percentage of the settlement amount.

By following these steps and considerations, you can effectively navigate the process of selling your universal life insurance policy and make an informed decision that aligns with your financial goals and needs.

Pros and cons of selling universal life insurance

Universal life insurance is a type of permanent life insurance that can accumulate cash value over time and also provide a death benefit to your beneficiaries. If your universal life insurance policy no longer serves its intended purpose, you may be able to sell it for cash through a life settlement.

Pros

• Quick lump sum payment
• End to premium payments
• More cash paid to you than the surrender value
• Flexibility to spend the payout as you wish

Cons

• Beneficiaries will not receive death benefits (in most settlements)
• Potential for tax liability
• May change eligibility for financial assistance like Medicaid
• Requires you to monitor your policy
• More exposure to risk

How to get the best deal when selling universal life insurance

Universal life insurance is a type of permanent life insurance that can accumulate cash value over time and also provide a death benefit to your beneficiaries. If your universal life insurance policy no longer serves its intended purpose, you may be able to sell it for cash through a life settlement.

• Hire an independent advisor: An independent advisor can provide an accurate appraisal of your policy's value, help you understand the tax implications, and guide you through the process. Their insights can be especially valuable if you're new to life settlements.
• Find a reputable, licensed broker: While a life settlement broker may charge a fee, they can often help you get the best possible offer by finding the highest bidder. They typically operate in an auction-style environment and have a fiduciary duty to work in your best interests.
• Get multiple offers: If you don't want to use a broker, you can go directly to life settlement providers. However, this may result in a lower offer since there's no competitive bidding process. Reach out to multiple providers and compare their offers to secure a better price.
• Round up your paperwork: The selling process involves more than just your life insurance policy; your medical history also plays a key role. Potential buyers will require access to your medical records to accurately assess your policy's value. Be prepared to sign a release allowing them to obtain these records.
• Understand the tax implications: The tax treatment of life settlements can be complex and depends on factors such as the type of settlement and your health condition. Consult a tax professional to understand the specific tax consequences of selling your policy.
• Consider the pros and cons: Selling your life insurance policy has both advantages and disadvantages. Weigh the immediate cash flow and relief from premium payments against the loss of the death benefit for your beneficiaries and potential tax implications.

Tax implications of selling universal life insurance

Universal life insurance is a popular form of permanent life insurance that can accumulate cash value over time and also provide a death benefit to your beneficiaries. If your universal life insurance policy no longer serves its intended purpose, you may be able to sell it for cash through a life settlement. However, it is important to consider the tax implications of selling your policy, as they can significantly impact the financial outcome.

When you sell your life insurance policy, you may generate taxable income in the form of gains. The taxable gain is generally calculated as the difference between the policy's sale price and the premiums you've paid into the policy. This gain is then subject to income tax, which can result in a significant tax liability. For example, if you sell a policy with a face value of $100,000, a cash surrender value of $40,000, and aggregate premium payments of $30,000 for $75,000, you will report income of $45,000. Of that $45,000, $10,000 must be reported as ordinary income, and the remaining $35,000 will be taxed as a capital gain.

Certain scenarios may offer tax exemptions when selling a life insurance policy. For instance, if you are terminally or chronically ill, a portion or the entirety of the proceeds from the sale might be tax-free. Additionally, if the policy qualifies as a "viatical settlement" due to your life expectancy, a tax exemption could apply. These exemptions can provide significant relief from potential tax burdens.

The type of life insurance policy and its ownership can also influence the tax implications. For example, selling a term life insurance policy often results in minimal tax consequences since it lacks a cash value component. However, permanent policies such as whole life, universal life, or variable life policies may build cash values, potentially making them subject to taxation upon sale. Ownership also matters; policies owned by individuals are treated differently from those owned by trusts or corporations.

Several strategies can help mitigate the tax implications of selling a life insurance policy. One approach is a tax-deferred exchange, where you exchange your current policy for another investment property, potentially deferring the tax liability. Another option is to use the proceeds to purchase a new life insurance policy with a lower face value, thus reducing the taxable gain. Charitable donations of the policy can also provide tax advantages.

Given the complexity of tax implications, seeking professional guidance from financial advisors, tax experts, and legal professionals is crucial. Their insights can aid in optimizing the financial outcome, ensuring compliance with tax laws, and identifying the most advantageous strategies.

Alternatives to selling universal life insurance

Universal life insurance is a popular form of permanent life insurance that can accumulate cash value over time and also provide a death benefit to your beneficiaries. However, if your universal life insurance policy no longer serves its intended purpose, you may be able to sell it for cash through a life settlement.

Using the Cash Value of the Policy

Whole and universal life insurance policies have both a face value and a cash value. Once the cash value reaches a certain threshold, you can withdraw from it or borrow against the policy. These actions will reduce the policy's death benefit unless you repay the money. Alternatively, you can use the excess cash value to cover your premium payments.

Convert to a Whole Life Insurance Policy

Convertible term policies give policyholders the option to convert to whole life insurance, typically without needing a new medical exam. Though the premiums for whole life insurance will be higher than those for a term life insurance policy, they will remain constant for the rest of your life. Plus, your policy will accumulate a cash value that you can use during your lifetime.

Seek an Accelerated Death Benefit

Some policies include an accelerated death benefit provision. Under this provision, the life insurance company will prepay some or all of the death benefit if the insured is diagnosed with a terminal illness. The diagnoses that trigger this provision may vary from one company to another, but if you meet the eligibility requirements, you can use the funds to cover your medical expenses.

Change the Beneficiary

You can change the beneficiary of your term or permanent life insurance policy as needed. If none of your loved ones rely on your income, you might consider using your policy as a gift, legacy donation, or charitable contribution. Rather than naming a relative, you could name a nonprofit, university, or other organisation as the beneficiary.

Reduce the Death Benefit

One way to lower the cost of life insurance is to reduce the death benefit. The death benefit is the face value of the policy. The lower the value of your policy, the lower your insurance premiums will be.

Frequently asked questions