What You Need to Know Before Cashing In or Cancelling Life Insurance

Brian Fricke, CFP®Life Insurance

WARNING: Read this before you cancel or cash in any life insurance policies.

What would you do if you had a $6 million term life insurance policy that you no longer needed and didn’t want to pay the premium? You probably would have cancelled the policy and stopped making premium payments.

Unfortunately, if you did this, you wouldn’t get any money back on your term policy. However, you could have sold the policy for $1.28 million!

There is a growing, but well-established business in life settlements, where institutional investors and companies will purchase life insurance policies that are no longer needed or wanted. These companies are often willing to pay more for policies than the cash surrender value of the insurance.

In fact, the purchasers don’t even care what kind of life insurance they’re buying. They will buy whole life, term, universal life, etc.

So if you know someone who has a life insurance policy they no longer need or want, have them look into a life settlement before they cancel or surrender the policy.

It’s not uncommon to get 300 to 500% more from a life settlement compared to the policy’s cash surrender value. This applies even to term insurance where there is no cash surrender value. It’s possible to sell the policy for 10 to 30% of the insurance amount. The $6 million term policy I mentioned is a real-life example.

There are certain guidelines for the policies that are bought. Generally, they must be at least two years old, the insured must be sixty years or older and the insurance amount should be at least $50,000, although most prefer policies of $100,000 or more.

Be careful when selling your life insurance policy to a life settlement company. You are usually better off using an independent broker who can solicit purchase offers from multiple buyers. You also want to make sure and work only with brokers/companies that represent policy owners, not the investors. They should also be willing to disclose all fees and expenses associated with the transaction.

You will have to pay taxes if you sell your life insurance. You will pay zero tax on your “basis.” This usually represents the lifetime premiums you’ve paid into the policy. Then you will pay ordinary income tax on any monies received that exceed your basis, up to the policy cash surrender value. Any money you receive that exceeds your policy cash surrender value would be taxed as a long-term capital gain.

For more advice on making the most of your incredible retirement, request your free copy of Brian’s book Worry Free Retirement.