When people consider life insurance policies, they often think of them as long-term investments designed to protect their families and loved ones after they pass away. However, what many policyholders may not realize is that life insurance policies can also be valuable financial tools during their lifetime. One lesser-known option is the ability to sell part of a life insurance policy, often through what’s known as a life settlement.

Understanding the Basics of Life Insurance

Before diving into the specifics of selling part of a life insurance policy, it’s essential to understand how life insurance works. There are two main types of life insurance: term life and permanent life insurance.

• Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years. If you die during the term, the policy pays a death benefit to your beneficiaries. Term life insurance policies do not accumulate cash value, so they generally cannot be sold.
• Permanent life insurance policies, such as whole life, universal life, or variable life insurance, provide coverage for the entirety of your life. These policies often accumulate cash value, making them more flexible and, in many cases, eligible for life settlements.

When we discuss selling part of a life insurance policy, we are usually referring to permanent life insurance policies.

What Does It Mean to Sell Part of a Life Insurance Policy?

Selling part of a life insurance policy is commonly done through a life settlement or a viatical settlement. In a life settlement, the policyholder sells all or a portion of their policy to a third party, typically a financial institution or investor, for a lump sum of cash. The buyer takes over paying the premiums and eventually receives the death benefit when the original policyholder passes away.

When selling a portion of the policy, the policyholder retains some interest in the policy, including possibly a reduced death benefit. In essence, it’s a way for someone to access some of the cash value of their life insurance while they are still alive, without giving up the entire policy.

Why Would Someone Want to Sell Part of Their Life Insurance Policy?

There are many reasons a policyholder might consider selling part of their life insurance policy. Some of the most common include:

Financial Need: If a person is facing significant financial difficulties, they may need quick access to cash to cover medical expenses, pay down debt, or manage other financial obligations.

Policy Premiums Have Become Too Expensive: As people age, the cost of maintaining a life insurance policy can increase, especially if the policy was purchased when they were younger and in better health. Selling a portion of the policy can reduce the ongoing premium payments, making it more affordable to maintain the remaining coverage.

Life Changes: Over time, the financial needs that prompted someone to purchase life insurance in the first place may have changed. For instance, children may be grown and financially independent, or a spouse might no longer need the same level of protection.

Access to Cash for Other Investments: Some policyholders may want to sell part of their policy to free up cash for investment opportunities or other financial goals.

Health Issues: In cases where the policyholder is terminally ill, a viatical settlement (a specific type of life settlement) allows them to sell part of their policy to access funds for medical treatment or other end-of-life expenses.

How Does the Process Work?

The process of selling part of a life insurance policy is relatively straightforward but can take some time, often several weeks or months. Here’s a step-by-step breakdown:

Assess Eligibility: First, the policyholder must determine whether their policy is eligible for a life settlement. Most life settlements apply to permanent life insurance policies with a substantial death benefit—typically $100,000 or more. Additionally, the policyholder’s age and health play a crucial role, as buyers are generally more interested in policies held by individuals over 65 or those with serious health conditions.

Consult a Life Settlement Broker: It’s often wise to work with a broker who specializes in life settlements. The broker can assess your policy, provide guidance, and connect you with potential buyers. They will also help you navigate the paperwork and regulatory requirements involved in selling part of your policy.

Obtain Offers: Once your broker has shopped your policy around, you’ll start receiving offers. Each offer will specify the amount of cash you’ll receive upfront, how much of the death benefit you’ll retain, and what portion of the premiums you’ll continue to pay (if any).

Review and Accept an Offer: It’s crucial to carefully review all offers and understand their terms. Once you accept an offer, you’ll move forward with the sale. At this stage, it’s also advisable to consult with a financial advisor or attorney to ensure you’re making the best decision.

Complete the Transaction: After all the paperwork is finalized, you’ll receive a lump sum payment for the portion of the policy you sold. The buyer will take over premium payments and ownership of the designated portion of the death benefit.