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Can You Sell Part of a Life Insurance Policy?

by

JG Wentworth

October 16, 2024

7 min

Woman pondering selling portion of life insurance policy

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.

Get Cash From Your Life Insurance Policy

Get Cash From Your Life Insurance Policy

Pros and Cons of Selling Part of a Life Insurance Policy

As with any financial decision, selling part of a life insurance policy has its advantages and disadvantages.

Pros:

Access to Immediate Cash: The most obvious benefit is that you can receive a lump sum of cash, which can be used to address pressing financial needs or invest in other opportunities.

Retain Some Coverage: By selling only part of the policy, you retain a portion of the death benefit, which can still provide financial security for your beneficiaries.

Reduce Premium Payments: Selling part of the policy may reduce or even eliminate the need for you to pay ongoing premiums, freeing up cash flow for other expenses

Cons:

Reduced Death Benefit: The downside to selling part of your policy is that the death benefit left to your beneficiaries will be reduced, which could impact their financial security in the future.

Potential Tax Implications: In some cases, the money you receive from selling part of your policy may be subject to taxes. It’s essential to understand the tax implications before moving forward.

Limited Options for Younger, Healthier Policyholders: Life settlements tend to be more attractive to buyers when the policyholder is older or in poor health. If you’re younger or in good health, finding a buyer might be more challenging.

Impact on Government Benefits: If you rely on Medicaid or other needs-based programs, the lump sum you receive from selling part of your life insurance policy could affect your eligibility.

Is Selling Part of Your Life Insurance Policy Right for You?

Deciding whether to sell part of your life insurance policy is a personal decision that should be made after careful consideration. It’s essential to weigh the immediate benefits of receiving cash against the long-term impact on your loved ones and financial future.

If you’re facing significant financial challenges, struggling to keep up with premium payments, or no longer need the full coverage provided by your policy, selling part of your life insurance could be a viable solution. However, it’s always a good idea to consult with financial professionals before making such a decision to ensure it aligns with your overall financial goals.

Final Thoughts

Selling part of a life insurance policy can be a practical way to unlock the financial value of your policy during your lifetime. By understanding the process, knowing the pros and cons, and seeking professional advice, you can make an informed decision that benefits both you and your loved ones.

Remember, this option isn’t right for everyone, but for some, it can provide much-needed financial relief or open new opportunities while still maintaining a degree of protection for beneficiaries.

This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.

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