How a Life Insurance Buyout Works

Last updated on March 26, 2019 by Eric Rosenberg in Life Settlements, Retirement Planning

Happy couple discussing a life insurance buyout.

A life insurance buyout is when a life insurance policyholder sells their life insurance policy for a cash payment. Life insurance buyouts are often called life settlements.

While most life insurance policies don’t make any payouts while you’re alive, you may be able to sell your life insurance policy while alive for a lump-sum or regular cash payout.

Read on to learn more about how life insurance buyouts work, when they make sense, and if a life insurance buyout is right for your financial needs.


Who Buys Life Insurance Policies?

In a life insurance settlement, a life settlement company typically arranges the sale process. Whether you have a term life insurance policy or a whole life policy (often called permanent life insurance), the same life settlement companies can help you through the process.

The insurance company doesn’t care who gets paid, they only care that someone is making the premium payments; and even after a life settlement company purchases a policy, the policy remains valid as long as someone continues to make payments.

Why do life settlement companies buy life insurance policies? Because a life settlement transaction turns a life insurance policy into a valuable financial asset for investors, while also providing lucrative cash incentives for policyholders.

Investors use life settlement companies to buy into a diverse “fund” of life insurance policies. To create a diverse fund of policies, businesses focus on life settlements to obtain a large number of policies, with the added benefit of providing much-needed funds to the policy sellers.

The life settlement is sometimes called a life insurance buyout, and the terms are interchangeable.


What is The Process of a Life Insurance Buyout?

Group of people talking about the process of life insurance buyouts.

The life insurance buyout process is relatively simple and straightforward, but unless you’ve been through it before, there are some necessary steps to understand that you may not expect. To avoid unpleasant surprises and get the best results, it is essential to give yourself plenty of time and not rush the process.

Before starting the life insurance buyout process, consider consulting with a trusted financial advisor or tax expert to ensure you don’t enter into an unfavorable sale or get hit with an unexpected tax bill.

Here is the standard life settlement process:

  • In a typical life insurance sale, the seller sends the life insurance policy and recent medical records to the life settlement provider.
  • The company reviews your information and puts together an offer.
  • Then, it’s up to you to decide whether to accept or reject the offer.

Typically, higher benefits, lower premiums, and worse health lead to a better settlement offer.

While it is a bit morbid to think about, the life insurance settlement offer is a calculation on your likelihood to outlive the life insurance policy. The more likely the buyer is to get a big payout from a future death benefit, the more they are willing to pay.

When a sale takes place, the buyer takes over premiums and receives any future death benefit from the policy.

It is the same life insurance policy you had before, just with a new beneficiary if you pass away and the policy pays out.

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If you sell a life insurance policy for more than the cash surrender value but less than the death benefit value, it is called a viatical settlement. Viatical settlements work similarly to other life insurance policy sales, so for the rest of this article, we will discuss all types of life insurance buyouts, which includes viatical settlements.


Why Would Someone Sell Their Life Insurance Policy?

There are many reasons why people sell their life insurance policy.

The biggest reasons come down to finances.

Typically, a seller is looking to save money by eliminating their monthly premium payment or get a cash payout to help with other expenses. Some sellers have enough in savings that they no longer need life insurance. Covering your financial needs with personal savings as opposed to insurance is called “self-insuring.”

When looking at the reasons to sell a life insurance policy, it is vital to understand the cash value of your life insurance policy. Over time, life insurance builds a cash value. Even term policies accumulate some level of cash value that the policy owner can access, though the cash value of a term policy is much lower than universal life or whole life insurance.

With any life insurance policy, you may have a cash surrender value. This is something life insurance companies offer to some policy owners looking to get rid of their life insurance. However, you could get more money from selling your life insurance than a cash value or cash surrender value would pay out. This is why it is important to look into a life insurance buyout before canceling your policy or cashing in with the insurance company.

Two people considering why they should do a life insurance buyout.

It is also important to take other financial considerations into account before selling or cashing out. If you want life insurance again in the future, it will likely cost more than your existing policy. Talk to an insurance agent to learn more about the replacement cost if you decide you ever change your mind.

Depending on your policy and how you decide to sell, there may be some tax implications. While many life insurance sales are tax-free, there are tax implications with some life settlements. Consult with a trusted tax or legal professional to better understand how this may impact your personal situation.

Finally, it is crucial to consider anyone who may rely on your life insurance if you were to pass away. While it is a difficult concept to grapple with, your loved ones may need the funds more than you. However, if pressed with medical bills and other costs from a terminal illness, you may need those funds.

The ultimate decision lies with you and your family. If you do decide the time is right, you can move forward with a life settlement broker or other life settlement company to start your life insurance policy buyout.


What are the Eligibility Requirements for a Life Insurance Buyout?

Each life insurance settlement company has different requirements when it comes to life insurance settlements.

In most cases, you should be 65 years or older to qualify for a life settlement. The older you are, the more valuable your policy becomes and the more likely you will find a willing buyer.

Most buyers also want a policy with a minimum value of $100,000. If you have a policy with a lower policy value, the potential death benefit may not be worth it for investors.

In summary, if you want to sell your life insurance policy for cash, you are in the best possible position if:

  • Your life insurance policy coverage is $100,000 or more.
  • You are 65 years old or older.

As discussed above, buyers will likely want to see your medical records when reviewing a potential sale. In those records, they want to see something that indicates a shorter life expectancy than the policy’s term, this increases the likelihood they will get a payout.


How Long Does It Take And What Happens Afterward?

A senior couple on vacation after finding out how long a life insurance buyout takes.

In most cases, a life settlement takes around six to 10 weeks to complete.

Depending on your specific life circumstances and insurance, it might be much quicker or take a lot longer to review. A handful of things happen behind the scenes to process a life insurance settlement.

Once you send in the details, an analyst will crunch the numbers and review your health, age, and policy factors to best understand the investment value of your policy. With that information in hand, they will make an offer to buy your policy.

After considering your cash surrender value, contacting your insurance company about an accelerated death benefit, and comparing those to your life settlement offer, you can make the most educated decision regarding a sale.

If you agree with your settlement offer and want to proceed, make sure to read the contract in detail before signing and returning.

Your life settlement provider should give you an approximate timeframe to receive payment after they get your signed paperwork. To get paid faster, you may be able to opt for a wire transfer instead of a check or other electronic payment. Banks commonly charge up to around $30 for a wire transfer, so be aware that fees may apply.


Does A Life Insurance Buyout Make Sense For You?

A life insurance buyout is a significant financial decision with long-term financial implications for you and your loved ones.

In many cases, a life insurance settlement makes a lot of sense, especially if you can no longer affoard your monthly premiums. Whether you want to sell your term life insurance or any other type of insurance, the settlement process can help you get cash in your pocket in a few months or less.

When deciding if a life insurance buyout is right for you, always discuss the matter with your loved ones and a trusted financial planner. Together, you should be able to decide if a life settlement is the right transaction to meet your financial needs.

Whether you want to lower your monthly bills, or you need access to a significant cash payment, there are many reasons to sell your life insurance.

When you work with the right life settlement provider, you’ll be in good shape to get the most for your policy.

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Eric Rosenberg
Eric Rosenberg is a personal finance expert residing in Southern California. He holds a BSBA in finance from the University of Colorado and an MBA in finance from the University of Denver. He has over a decade of experience writing about financial topics online. His work has been featured on Business Insider, Investopedia, The Balance, Investor Junkie, and a wide range of quality financial publications.

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