Pros and Cons of Selling Your Life Insurance Policy

If you’re thinking about selling your life insurance policy, you may have come across the term “life settlement investment.” It’s a big decision and one you should fully understand before moving forward.

While life settlements are often described as investments for institutional buyers, they can also provide a financial lifeline for policyholders. If you no longer need your life insurance coverage or can no longer afford it, selling your policy could offer far more value than letting it lapse or surrendering it back to the insurance company.

In this guide, we’ll explain the basics of life settlement investments, highlight the pros and cons of selling your policy, and walk you through how the process works so you can make the right decision for your situation.

What Is a Life Settlement?

A life settlement is a financial transaction in which you, the policyholder, sell your life insurance policy to a third party  such as an individual buyer, investment firm, or specialized settlement company. In exchange for selling the policy, you receive a lump sum cash payment that is typically much higher than the policy’s cash surrender value.

Once sold, the buyer becomes the new owner and:

• Takes over responsibility for paying any future premiums
• Becomes the beneficiary of the policy
• Receives the death benefit when you pass away

From your perspective, a life settlement allows you to access the value of your policy while you are still alive. It can be a smart option if the original purpose of the policy no longer applies, or if you simply need funds for healthcare, retirement, or unexpected expenses.

These transactions are commonly referred to as “life settlement investments” because buyers (often institutional investors or funds) treat the policy as a financial asset. They purchase it at a discount, maintain it, and collect the full benefit later. But for you, the policyholder, the focus isn’t on investing, it’s about unlocking cash from something you already own.

Why You May Not Have Heard of It Before

Despite being legal and regulated, many people haven’t heard about life settlements. One reason is that the life insurance industry hasn’t widely promoted this option. In fact, many policyholders surrender or lapse their policies without ever realizing they could sell them for more.

You might also associate the idea of “investments” with stocks or mutual funds, not life insurance. But life settlements have grown into a legitimate financial market, backed by large institutions and private equity firms. That doesn’t mean you need to understand how investors profit. What matters is whether selling your policy helps you meet your financial goals.

If you’re 65 or older and no longer need or want your policy, a life settlement may be the simplest way to turn an unused asset into something you can use today.

Is It Legal to Sell Your Life Insurance Policy?

Yes, life settlements are legal. In fact, the right to sell your life insurance policy was established over 100 years ago. In 1911, the U.S. Supreme Court ruled in Grigsby v. Russell that life insurance is considered private property, meaning it can be legally sold to another party.

Today, the life settlement industry is regulated in most U.S. states to ensure fair treatment for policyholders. If you’re considering a life settlement, it’s important to work with licensed professionals who can walk you through the process and disclose all fees upfront.

Pros of Selling Your Life Insurance Policy

There are many advantages to selling a life insurance policy, especially for seniors who no longer need coverage or want to access the value in their policy.

You’ll Get More Than If You Let It Lapse or Surrender It

Many policyholders don’t realize that lapsing or surrendering a policy usually results in little or no return. If you let it lapse, you may get nothing. If you surrender it, you’ll receive only the cash surrender value which is often a fraction of the policy’s worth.

With a life settlement, however, you can often receive three to five times the surrender value. That’s real money that can be used to support your financial needs now.

You Receive a Lump Sum of Cash

A life settlement provides an immediate cash payout. You can use the money for anything you need: medical bills, long-term care, travel, home improvements, or simply supplementing your retirement income.

No More Premium Payments

If you’re struggling to keep up with life insurance premiums, selling your policy eliminates that financial burden. The buyer takes over all future payments once the policy changes hands.

You Can Use the Funds However You Choose

There are no restrictions on how you use the money from a life settlement. It’s your cash you can spend it, save it, invest it, or gift it to family members.

You May Be Able to Keep Part of Your Policy

Some settlement providers offer an option called a “retained death benefit,” where you sell only part of your policy. You receive a reduced payout but keep a portion of the death benefit for your loved ones.

Cons of Selling Life Insurance Policy

While there are clear benefits, selling your policy does come with trade-offs. Here are some factors to consider before moving forward:

Your Beneficiaries Will No Longer Receive the Death Benefit

When you sell your policy, your family or other beneficiaries won’t receive the death benefit. Instead, it goes to the investor who purchased the policy. This can be a difficult decision if your policy was originally intended to provide financial security for loved ones.

You Might Not Be Able to Get New Life Insurance

If you change your mind later or your financial situation shifts, buying a new policy could be difficult especially if your health has declined. Life insurance becomes more expensive as you age, and some people may no longer qualify at all.

Some of the Proceeds May Be Taxable

Depending on your circumstances, a portion of the money you receive from a life settlement could be subject to income or capital gains taxes. It’s wise to consult a tax advisor before making a decision.

It Could Affect Medicaid or Government Benefits

Receiving a large cash payout might impact your eligibility for Medicaid or Supplemental Security Income (SSI), both government programs. Be sure to talk to a benefits advisor or elder law attorney if this applies to you.

Fees and Commissions Can Reduce Your Payout

Not all life settlement providers operate with the same level of transparency. Some charge high broker fees or commissions that cut into your payout. That’s why it’s critical to work with a licensed, reputable provider who discloses all fees upfront.

Who Is a Good Candidate for a Life Settlement?

You may qualify for a life settlement if you:

• Are 65 years old or older
• Own a life insurance policy with a death benefit of $100,000 or more
• Have experienced a change in your health since the policy was issued
• Are considering surrendering or lapsing the policy due to cost or changing needs

While universal life policies are most commonly sold, whole life and even convertible term policies can also qualify. Healthy individuals over 70 with larger policies may also be eligible.

How the Life Settlement Process Works

If you’re curious about what to expect, here’s a breakdown of the typical steps:

Step 1: See If You Qualify

You can start with a simple prequalification form or phone call. You’ll share basic details about your policy, age, and health.

Step 2: Policy Review and Appraisal

If you prequalify, a licensed settlement expert will collect more information and contact your insurance provider to verify details. This helps determine the market value of your policy.

Step 3: Receive an Offer

You’ll receive a cash offer to purchase your policy. There’s no obligation to accept. If you decline, you can keep your policy and continue paying premiums.

Step 4: Accept and Get Paid

If you accept the offer, the buyer finalizes the paperwork and transfers funds through a secure escrow process. This protects you and ensures the transaction is handled properly. Once everything is complete, you receive your payout.

Final Thoughts: Should You Sell Your Life Insurance Policy?

Selling your life insurance policy through a life settlement can be a smart financial decision especially if the alternative is letting it lapse or surrendering it for a minimal payout. For many seniors, it offers a practical way to turn an unused asset into meaningful financial support.

Still, it’s not the right choice for everyone. Consider your current needs, your future plans, and the impact on your family. Speak with a qualified settlement provider, financial advisor, or tax expert to fully understand your options.

Ready to See What Your Policy Is Worth?

If you’re ready to explore your options, we’re here to help. Use our free life settlement calculator or contact us to find out if you qualify and how much your policy may be worth.