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Should I Sell My Life Insurance Policy?

By on March 19, 2014 in Insurance, Life Insurance

Should I Sell My Life Insurance Policy?A life insurance policy is an expense to protect the financial stability of your family. If you die unexpectedly the policy payout helps your family overcome the loss of your income over the coming years and decades. Yet there is a sub-industry where you can sell your life insurance policy to someone else. Why would you want to do this when life insurance is designed to protect your family?

Why Sell Your Life Insurance Policy?

The main reason life insurance policies are sold before their expiration or use of the policy is to raise money for other uses. Imagine you end up in the hospital with a serious disease and only a year to live. You have a $2,000,000 policy that you can sell for $1,500,000. That money can be used to pay for your care, to knock some things off of your bucket list, or to help your family pay for some of your final expenses.

Why Would Anyone Buy Another Person’s Life Insurance Policy?

As with buying and selling any other financial instrument, the answer is simple: to profit.

Investors are willing to put up the money to buy your insurance policy today if they believe that you will die with the policy still in force. This is a morbid thought, but the investor is betting you will die and they will get the insurance payout before the policy expires. When you are talking about significant amounts of money the reward can be huge for the investor. (Of course on the other hand if you live longer than expected, the risk can be crushing.)

This puts the person or company who buys your policy at odds with your well being. They are hoping and wishing you would pass away with the policy unexpired. Everyone else in your life presumably wants you to live as long as possible.

Unfortunately when you are in a tight financial position, selling an insurance policy is a fast if not unorthodox way to raise funds.

Pros and Cons of Selling Your Life Insurance Policy

Selling a insurance policy on your life is not an easy decision nor should it be taken lightly. As with anything in life there are significant pros and cons.

Pros:

  • If you live past the policy expiration, you “win” the gamble by getting the cash when you would not have received it under normal circumstances.
  • If you are running out of options, selling your policy can raise money to pay for other critical needs like healthcare costs.
  • Although not recommended for desperate measures, you could in theory invest the proceeds from the sale and still come out ahead.

Cons:

  • The biggest risk is the loss between what the policy pays out to the beneficiary and what the buyer offers for your life insurance policy. If you take a 25% or 50% hit that could end up being hundreds of thousands of dollars. If you die shortly after selling the policy, the investor enjoys a huge return on their investment.
  • If you die without a life insurance policy in place your family might have to bear the brunt of your final costs. If you leave an estate they might have to sell items from the estate to pay these costs as well.

Should I Sell My Life Insurance Policy?

At the end of the day selling a life insurance policy is usually a desperate move. Whether or not this strategy is right for you depends on your financial situation and life expectancy. The investor is hoping for a big payoff, but there is a chance you can come out well ahead by selling a policy and living past its expiration.

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