Dear Savvy Senior: I have a life insurance policy that I’ve been paying on for years that I really don’t need any longer. I’ve heard that I can actually sell it for a nice payout. What can you tell me? — Interested In Selling
Dear Interested: Selling a life insurance policy, even a term life policy that you don’t want or need any longer — a transaction known as a “life settlement” — has become a popular option among retirees. Here’s how it works.
A life settlement is the sale of an existing life insurance policy to a third party company for cash. Life settlements are typically best suited for people over age 65 who own a policy with a face value of $100,000 or more or someone younger who has experienced a significant change in health.
Historically, if an owner of a life insurance policy decided they no longer needed it, they would either let the policy lapse or turn it in for a meager cash surrender value. But now, with the life settlement option, you can actually sell your policy for more than the cash surrender value would be, but less than its net death benefit.
Once you sell it, the life settlement company then becomes the new owner of the policy, pays the future premiums and collects the death benefit.
How much money you can expect to get depends on your age, health and life expectancy, the type of insurance policy, the premium costs and the cash value of your policy.
You may receive four to eight times more than the policy’s cash surrender value.
If you’re interested in a life settlement here are some things you should know:
>> Shop around: Payouts can vary. To ensure you get the best price, get quotes from several companies. Find out what broker and transaction fees you’ll be required to pay. Coventry (Coven tryDirect.com, 888-858-9344), the nation’s first and largest provider of life settlements, offers some of the highest cash payouts. To search for other providers or brokers, visit the Life Insurance Settlement Association at LISA.org.
>> Be prudent: Life settlements are regulated in most states. Find out from your state insurance commissioner (see NAIC.org) if the life settlement company you’re interested in is properly licensed.
>> Protect your privacy: When you sell your life insurance policy, you will have to sign a waiver authorizing the release of medical and personal information to the buyer to determine how much to offer for your policy. Make sure the company has procedures to protect your confidentiality.
>> Understand the tax implications: The Tax Cuts and Jobs Act recently updated the tax treatment of a life settlement to be treated the same as the surrender of a policy back to the insurance company. This can be complicated, so be sure to consult a tax advisor.
Jim Miller is a contributor to NBCTV’s “Today” program and author of “The Savvy Senior.” Send your questions to Savvy Senior, P.O. Box 5443, Norman, OK 73070; or visit savvysenior.org.