Complete Guide to Buying Out Life Insurance Policies
Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina.
He has also earned an MFA in screenwriting from Chapman Univer…
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Written by
Jeffrey Johnson
Insurance Lawyer
Benjamin Carr was a licensed insurance agent in Georgia and has two years’ experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.
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Reviewed by
Benji Carr
Former Licensed Life Insurance Agent
UPDATED: Feb 16, 2022
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The Facts of Life
A life insurance buyout occurs when a policyholder sells their policy to a settlement company for a cash payment
Life insurance buyouts are often a result of financial strain on a policyholder
You may be eligible for a life insurance buyout if you are 65 or older and have a policy limit at or above $100,000
If you’re interested in buying out life insurance policies, there are a few things you’ll want to know before you do. Essentially, a life insurance buyout occurs when the policyholder sells their senior life insurance policy and receives a cash payment. This type of transaction is also called a life settlement.
To know whether a life insurance buyout is right for you, you’ll want to evaluate your finances and see whether there are other options you can turn to for financial assistance. If you do decide to have the company buy out your policy, you should do your research beforehand to make sure you know what to expect.
As you shop around for the right life insurance policy, it can seem daunting to know what to choose. This is why it’s so important to compare quotes from several different companies. Doing so allows you to find the coverage options that would work best for you at the lowest prices possible.
Be sure to use our free quote tool above to get started in your search for life insurance today.
How does a life insurance buyout work?
If you’re interested in getting a life insurance buyout, you should consider speaking with a financial advisor or tax expert ahead of time. They could help you know whether the sale is favorable and can also counsel you on how to avoid any unexpected tax bills.
The typical process for a life settlement is as follows:
The seller of the life insurance policy sends the policy and a set of recent medical records to the life settlement provider.
The settlement provider reviews the policyholder’s information and comes up with an offer.
The policyholder decides whether to accept the offer or take the policy elsewhere.
The settlement process takes your likelihood to outlive your life insurance policy into account. So while it sounds a bit morbid, it works in your favor if the settlement company believes it will receive a big payout from the future death benefit of your policy. The company would take over the monthly payments on the policy and be named the new beneficiary whenever you pass away.
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What is whole life insurance?
Whole life insurance is the most common form of a permanent life insurance policy. A whole life insurance policy will continue to cover a policyholder for the duration of their life, as long as premiums are paid on time. It is possible to get a life insurance buyout with a whole life insurance policy as well as a term life policy.
With a whole life insurance policy, you may essentially have a type of life insurance that pays you back. Most whole life policies accumulate a cash value in addition to carrying a specific death benefit to be paid out to your beneficiaries when you pass away. Because whole life policies carry a cash value that you can use during your lifetime if necessary, many people consider whole life insurance as an investment of sorts.
What happens to the cash value of a whole life policy at death?
If you have a whole life policy that carries a cash value, the life insurance company will absorb the cash value of your policy when you die, and your beneficiaries will receive the death benefit of your policy. When it comes to a life insurance buyout, the settlement company will get the full death benefit, but the life insurance company would still absorb the full amount of the cash value.
You may have needed to withdraw against the cash value of your life insurance policy at some point. If that’s the case and the money has not been paid back — often with interest — then this will decrease the death benefit of your policy that the settlement company would receive.
Who is eligible for a life insurance buyout?
Every settlement company has different requirements when it comes to a life insurance buyout. Typically, you may be eligible for a life settlement if:
You are 65 or older.
The coverage on your life insurance policy is $100,000 or more.
You have kept up with the premium payments for your policy.
If you are under the age of 65, or if you have a policy with a coverage limit lower than $100,000, you will need to consider other ways to supplement your financial needs.
While a lot of people use a life settlement as financial assistance, some people have enough money saved up that they no longer need their life insurance policy and do not want to keep up the steady monthly payments on the premiums. These people often find it most advantageous to pursue multiple settlement companies to see who offers them the best settlement payout.
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What is a viatical settlement?
A viatical settlement is the same as a life insurance buyout, but it pertains specifically to someone who has been diagnosed with a life-threatening illness.
In a viatical settlement, the policyholder is able to sell their policy for more than the surrender value — which normally equals the cash value of a permanent life policy — but less than the market value of the policy. Typically, this happens because the policyholder’s illness indicates the death benefit of the policy will be paid out sooner rather than later.
How does a buyout work with universal life insurance?
A life insurance buyout with a universal life insurance policy works just the same as a buyout with another type of permanent life insurance coverage.
If you have a universal policy, you may be entitled to less of a cash payment when selling your policy. This will depend on the death benefit of your policy and whether you’ve been paying more than the minimum premium in order to accumulate a higher cash value.
Anyone interested in selling a life insurance policy should first seriously consider whether they want the policy for the future. If you need financial assistance but you want to hang onto your policy, you may be able to use the cash value of your policy to assist with your temporary needs.
You could also sell your policy but invest in a smaller policy — like one for funeral expenses — to make sure your loved ones are not burdened by the financial strain of your passing.
It is important for you to keep your options open as you consider whether a life insurance buyout is right for you. You should not have to rush into a decision and face the potential of regretting your choice in the future. Instead, take your time and only make a choice once you’ve spoken with trusted advisors and gotten the deal you know you deserve.
If you are shopping for a new life insurance policy, you can use our free quote tool below to find and compare rates from the best companies in your area today.
