UPDATED: Jul 24, 2011

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Written By: Laura BerryReviewed By: Daniel WalkerUPDATED: Jul 24, 2011Fact Checked

With the tough financial outlook facing many, people are looking for ways to liquidate assets to provide for immediate needs. After all, if you have a life insurance policy that is worth money, it may be better to cash that policy in and use the proceeds to provide for immediate needs. If you choose to do this, there are several things you should know.

What is a cash surrender value?

Life insurance policies typically have a “cash surrender” value. Normally, this value is very low when the policy is new, and climbs as the policy matures. The life insurance company is willing to cash in policies because it will not have to pay the face value if a person dies. The company weighs the odds and calculates what it is worth to buy back the policy. Typically, the cash value will only be a fraction of the original face value on a term policy. Whole life policies may have higher cash surrender values.

Not every life insurance policy can be purchased

Not all policies are eligible for “life settlement.” Very new policies, such as those which have only been in place for two years, and those which are not “convertible” for the entire term or a portion of it, may be disqualified. The only way to know the circumstances of your policy are to talk to your insurance provider and read your policy. Generally, the only valuable life insurance policies are those which are paid up and have aged considerably, although whole life policies build cash value faster due to their higher premiums.

Finding the cash value of your life insurance policy from your provider is the first step. But before you cash in, you should be aware that there are other options for selling your life insurance policy.

What is a Viatical Settlement?

If you are suffering from a terminal illness and need cash for immediate expenses, there are several companies who offer “viatical settlements.” This means, in simple terms, that they buy your life insurance policy for cash, knowing that they will soon be able to collect the full value. While this may seem macabre to some, it is a growing industry as investors see the financial value in a guaranteed payment. Insurance companies are not pleased with this system, however, and have worked hard to support legislation that regulates it. Many companies have clauses in their life insurance contracts that prohibit the sale of a policy for viatical settlement, so be sure to review your policy carefully before considering this option. Also, because of the nature of the business, there are quite a few disreputable companies operating viatical schemes, so only deal with a reputable company with a proven record.

What companies buy life insurance policies?

You can find companies that buy life insurance policies, either under viatical settlement arrangements or other types of payout plans, by visiting your state’s Department of Insurance website. There you will find a list of companies that specialize in this type of purchase and are generally safe to do business with, as they are recognized by the state agency. It is still necessary to check the credentials of these companies, but being listed on this website is a good indication that the businesses are legitimate.

If you are a member of an organization that endorses insurance policies, such as the AARP, you may be able to consult them, as well. Many senior organizations, in particular, have lists of companies that specialize in buying life insurance policies, and they can often refer you to those which are familiar with the type of policy you hold.

You may also want to contact an insurance broker. You can get a list of these agents from your state’s Department of Insurance website. These brokers will examine your policy and contact multiple banks, financial agencies, and others who will consider buying your policy. Shopping your life insurance policy to multiple buyers will usually get you a better price and allow you to have options for selling your policy.

Before you decide to sell your life insurance policy, carefully consider all your options. After all, life insurance is intended to benefit your loved ones if something happens to you, and little can replace this security net for them. It may be possible for you to borrow against your policy without releasing its entire value, and pay the loan back when your financial situation improves. On the other hand, the worst thing you can do is let your policy lapse completely. If this happens, you will probably get no cash value, and your entire investment will be lost. Talk to a financial advisor to see what your best options may be.

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A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Written by Laura Berry
Former Insurance Agent Laura Berry

Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Car Insurance Agent Daniel Walker