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Evaluating Your Policy
When you sell your insurance policy, the buyer:
- gives you a lump sum amount for the policy
- becomes the beneficiary
- assumes responsibility for all future premium payments
- collects the death benefit when you die
The amount you receive will be greater than the policy's cash value and less than its death benefit. Whole life and universal life policies build up cash value, consisting of the premiums you pay and the income those premiums earn, minus the cost of the insurance. Term policies require smaller premiums because they build no cash value. Naturally, a policy buyer would prefer the insured to be elderly, in poor health, with a policy that has low cash value and a high death benefit, because all of these factors might increase the buyer's yield-to-maturity on the policy when you die.
Using a Broker
You will be asked to fill out a questionnaire when you contact a life settlement broker. The questions will address the details of the life insurance policy, as well as information about your age and health. You'll also have to provide a copy of the policy, a payment schedule, medical records and your credit history. The broker will evaluate the policy and perhaps make you an offer. If you accept the offer, you'll sign closing documents, submit a change form to the insurance company and, after the policy is transferred, receive a check or money transfer from the broker.
Pros and Cons
Selling your life insurance might be a good idea if you
can't or don't want to continue paying premiums, or if circumstances have changed so you no longer need a life insurance policy. The transaction puts cash in your pocket and relieves you of a continuing obligation. On the downside, you will have to disclose a lot of personal information and, unless you shop around, you won't necessarily know whether you are getting a good settlement price. The broker may take hefty commissions and fees. Depending on the circumstances, the proceeds may count as taxable income, do it's a good idea to speak with your tax advisor before signing on the dotted line. Lastly, your beneficiary will no longer receive the death benefit.
Consider the following alternatives:
1. You can surrender a non-term life insurance policy and receive its surrender value, which may be substantially less than its cash value. It depends on how long you've had the policy.
2. Another way to access the cash value is to borrow from the policy. This is usually a tax-free transaction and any interest you pay goes back into the policy.
3. You might be able to convert the policy into an annuity that pays out monthly income for a set period or for the rest of your life. If the cash value is less than the premiums you paid in, the annuity is tax-free until the amount you receive exceeds the amount you paid in.
4. Consider having the beneficiary pay the premiums, which will relieve you of a long-term expense and put more money in your pocket.
5. Most policies allow you to withdraw part of the death benefit if you are chronically or terminally ill.