Selling Your Life Insurance Policy for Cold, Hard Cash

by Paul Michael on 4 February 2011 4 comments

Depending on your age, your health, and several other factors, your current life insurance policy could be worth a lot of money to someone else. And believe it or not, people are cashing in on this new form of equity. Life insurance speculation seems morbid, but it’s very real and can be lucrative to both parties.

First, What’s This All About?

Well, most of us have life insurance policies. They are a monthly expense that we feel necessary because we don’t want our loved ones to be financially burdened if we die. (See also: How (and Why) to Buy Life Insurance)

But when we reach a certain age and our children (and even grandchildren) are all grown up, the life insurance policy we have may be something we’d like to cash in. It could also be something you want access to if you have contracted a terminal illness and have only a short amount of time to live. Whether it’s for medical bills, travel, or just wanting to enjoy your final days with some extra money, having access to a large, lump-sum of cash is an option many people in this situation would like.

Whatever their reasons, the option is there for many people to cash out their life insurance policies for less than they're worth. The holder of the policy gets the cash, someone else takes over the payments, and the life insurance company pays out less than face value on the policy — everyone's a winner.

The Numbers Nitty-Gritty

So if you’re thinking about cancelling your life insurance policy, don’t. Not just yet. Because all of the money you’ve put into that policy over the years can be turned into a huge lump sum for you — as much as 80% of the total face value of your actual life insurance policy. If you have a $2 million policy (which is common these days, considering you need 20 times your annual salary to cover your loved ones) that equates to as much as $1.6 million. That’s a whole lot better than just ripping up the policy and walking away.

Check for Accelerated Death Benefits

First, you can check to see if your policy allows you to collect “accelerated death benefits.” Not all of them do, but if your policy has that option and you have less than 24 months or less left to live, you can get a check for a huge percentage of your insurance policy’s face value. Not only that, but you no longer have to pay premiums. It’s also good for the insurance company because they are saving money on the full payout they’d have to issue in less than a few years time.

If this applies to you, or someone you know, make sure you explore this option.

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Selling the Policy to a Third Party

If you discover that you have no “accelerated death benefits” option, you are by no means out of luck. Now you can explore an option that can be just as lucrative. The term you need to know here is “viatical settlement.” In a nutshell, here’s how it works according to Wisconsin's Department of Financial Institutions:

Typically, the person or viatical settlement company acquiring the life insurance policy death benefit pays the viator a discounted amount of the actual death benefit, and becomes the irrevocable beneficiary of the life insurance policy, receiving the full amount of the death benefit upon the death of the viator. Increasingly, business firms are buying life insurance policies of the terminally ill and re-selling them at marked-up prices as investments.

So your life insurance policy becomes an investment to someone else. You collect a chunk of money based on the face value of your policy, the third party pays your insurance premiums and, when you die, they collect the full face value of the policy.

The Moral Implications

This is where things get murky. If people are dying and want the cash, that’s their call. But think about this for a second. With insurance, neither party has a vested interest in someone’s death. The person with the policy (usually) doesn’t want to die, and the insurer definitely does not want that person to die.

But when you sell that life insurance policy, things get very different. Now there’s an entity out there, somewhere, that will absolutely profit from the death of the person who signed over their life insurance policy. And the quicker that person dies, the better. It’s grim, but it’s true. What’s more, that third party could decide they don’t want to hang around to collect on the deal and sell it off for a slight profit. Who knows where that life insurance policy could end up.

It’s quite possible that shady companies that operate like mafia loan sharks could scoop up these policies. What will they do to make sure they collect on the full amounts? Would you feel safe knowing that someone out there wants you dead? After all, you may sell your policy when you’re 75 and continue to live a good life for another 20 years. That’s a long time for anyone to wait for a payday.

Of course, this is taking the idea to extremes, but it’s worth considering.

The big question is, would you sell a $2 million life insurance policy for, say, $1 million in cash? Would you do it if you had just 24 months to live? Would you sell it when you reached the ripe old age of 70, or even 80? Or is this money something you would rather leave to your family?

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Andrea Karim's picture

Oh, man, if I had twenty four months to live and a couple million to blow, you can bet I'd collect the heck out of that money. Hello, Tahiti!

Guest's picture

Keep in mind that most insurance companies frown upon buying life insurance solely for the purpose of selling it to a third party. In fact, many insurance companies will ask this question on their application, and may decline coverage if this is your intent.

Guest's picture

If you are considering a viatical settlement or canceling your policy early, consult with a trusted advisor first. This is especially true if you are older or have a policy with significant cash value. There are really a lot of factors that need to be carefully considered before making a decision as important as selling or canceling your life inusrance.

Guest's picture

I'd consult your life insurance agent, assuming you have one! As an insurance agent myself I find it fascinating that you can sell your policy to a third party.