Buying a life insurance policy – especially a permanent one – is a long-term financial commitment. You might pay between two to 10 times as much for a whole life policy than you would for a similar amount of term life insurance, according to insurance agent group Trusted Choice. However, if permanent life insurance is the best way to protect your family or business, then it can be worth the cost.
Buying a life insurance policy – especially a permanent one – is a long-term financial commitment. You might pay between two to 10 times as much for a whole life policy than you would for a similar amount of term life insurance, according to insurance agent group Trusted Choice. However, if permanent life insurance is the best way to protect your family or business, then it can be worth the cost. 
 
But circumstances change. Perhaps your reasons for buying permanent life insurance no longer exist, or maybe you can no longer afford your premiums. If so, you might be tempted by the idea of selling your policy in what’s known as a life insurance settlement. 
 
Sellers are generally over age 65, according to the Life Insurance Settlement Association (LISA). Universal life policies and death benefit amounts over $100,000 are the most desirable, according to LISA, although it’s not unheard of for term life and smaller policies to be sold. 
 
Here’s how it works: 
 
- Life insurance settlements can be handled by a broker or a provider. LISA explains the difference here and suggests questions to ask. 
- You sell your policy to a third party and receive cash in return. The amount will be less than your death benefit but more than you’d have received if you surrendered the policy for its cash value – often about four times more, according to Afonso Januário and Narayan Naik of the London Business School. The amount will be based on your life expectancy and the face amount of your policy. The longer you are expected to live, the less you will be offered because the buyer expects to pay more in premiums before you die. 
- The buyer will start paying your premiums, or resell the policy to someone else who will pay the premiums. When you die, the owner will receive your death benefit. 
 
Life settlements are often pooled together and owned by institutional investors, although some are owned by individuals. 
 
While these deals are a way to make money on a policy you no longer need, they do have drawbacks — and if you still require coverage, they’re almost never a good idea. 
 
It can also be tough to determine whether you’re getting a good value for your policy. You’ll also pay fees to the various players involved, which can eat up as much as 30% of your settlement, according to the Financial Industry Regulatory Authority (FINRA). 
 
What to ask before selling your life insurance policy 
 
It’s not impossible to get a good deal on a life insurance settlement, but before you sell, ask yourself a few questions: 
 
Do you still need the coverage? The buyer gets more value from purchasing your life insurance policy than you do from selling it – that’s why they want to buy it from you. If you can afford the premiums, and you have beneficiaries, you’re better off holding on to the policy. You’ll pay more for another life insurance plan if you have regrets later and want to buy one. 
 
Are there other ways to pay your premium? If the premiums are becoming unmanageable, you do have alternatives, like taking loans from your policy or reducing your death benefit. Here’s more on what to do if you can’t pay your life insurance premium. 
 
How much do you stand to benefit? Just because you’ll get more cash from a life settlement than you will from surrendering the policy doesn’t mean that you should take the first offer you receive. Shop around and compare your offers to the amount you’ll pay in commission and fees to your broker. And keep in mind that your family will benefit the most from keeping the policy. 
 
How will you be impacted by the extra cash? Getting a sudden windfall of money is almost never free of consequences. The proceeds from selling your life insurance policy may affect your ability to qualify for public assistance, and they may also be taxable. 
 
Can you trust the buyer? Never engage in a life insurance transaction with someone you don’t trust. Check that your broker is licensed through your state insurance department, and make sure you understand what elements of your personal information the buyer can access. Don’t work with a buyer or broker who rushes you into a decision. 
 
Selling your life insurance policy safely 
 
Avoid responding to a solicitation from a life insurance settlement firm. It’s better to find a life settlement broker through your insurance agent or financial advisor. In some cases, your agent might even be licensed to do the transaction. Research your broker’s license status and any complaints against them through your state insurance department. 
 
If you need life insurance, there’s almost never a good reason to sell your policy. But if you don’t, a settlement can be a good idea – as long as you ask the right questions along the way. 
 
Alice Holbrook is a staff writer covering insurance and investing for NerdWallet. Follow her on Twitter @alicenerdwallet and on Google+. 
 
© Copyright 2015 NerdWallet, Inc. All Rights Reserved

DISCLAIMER: The trademarks and copyrighted material found on this page are property of their respective owners.
All news