Why you may not be worth more dead than alive if you own a life insurance policy

“You’re worth more dead than alive!” the greedy Mr. Potter tells George Bailey in the classic film "It's a Wonderful Life," referring to Bailey’s life insurance policy.

That may have been true for the Bailey character, whose age is estimated to have been around his late 30s to early 40s, but not necessarily for seniors nowadays. Seniors, ages 65 and older, with life insurance policies can sell them for significantly more than the cash value they'd receive by surrendering them to the insurance company that wrote them or letting the policies lapse and receiving nothing.

Seniors who sold their life insurance plans through life settlements received on average 6.5 times more than the cash surrender value, according to data from the Life Insurance Settlement Association, a nonprofit trade organization for the life settlement industry.

“Everyone that owns a life insurance policy needs to understand that like a home or other investment, it’s your asset to do with as you see fit,” said Bryan Nicholson, executive director of the association.  

What is a life settlement?

A life settlement is selling a life insurance policy to an entity other than the insurance company that issued the policy. The entity that buys the policy then takes over paying the premiums and collects the money when the death benefit is paid.

Usually, these transactions are limited to seniors 65 or older with a policy of $100,000 or more.  

Younger people with certain health conditions, such as a terminal or chronic illness, are considered on a case-by-case basis and may be granted an exception.

Why would someone want to sell their life insurance policy?

People often sell their policies because their needs or circumstances have changed. Some of the most common reasons, experts say, include:

• The policy was originally purchased to protect a spouse or pay off a mortgage, but now the beneficiaries are financially secure. “Rather than letting the policy lapse or continuing to pay the premium, it can make sense to receive a cash payment now in lieu of a death benefit that doesn’t provide value to the insured while still alive,” said Daniel Milan, investment adviser representative and managing partner at Cornerstone Financial Services in Southfield, Michigan.
• The policyholder needs money for long-term care, medical costs, or to supplement their retirement income.
• The policy premiums have simply become too expensive to maintain.

Who wants your insurance policy?

Large financial entities such as banks, pension funds, hedge funds and insurance companies want to buy your life insurance policy because, for them, it’s a long-term alternative investment, Nicholson said.

“These policies offer predictable returns that are not tied to the stock market, making them attractive,” he said.

How is a life insurance policy valued?

The value of the offers to buy a policy are based on several factors, according to Milan, including, but not limited to:

• The insured’s life expectancy based on their health and insurance actuary tables.
• The value of the death benefit.
• The annual insurance premium.
• Whether the policy is a term or permanent insurance policy. Permanent life insurance policies are generally more valuable because they build cash value, while term policies typically don't, which makes them eligible for a settlement only if convertible or if the insured is terminally ill. 

How do you sell a life insurance policy through a life settlement?

Policy holders can use a life settlement broker who will evaluate the policy and present it to buyers of life insurance policies, Milan said. Buyers could include private equity funds, private individual buyers, family offices and institutional investment funds.

“While there typically is no up-front cost for this service, there is a back-end success fee where the broker will keep a percentage of the purchase price if they are able to successfully sell the policy − typically 20% to 30%,” he said.

The process, Nicholson said, includes:

• Complete a simple, confidential application. “No medical exam is required, but policy information and medical records are reviewed to evaluate the case,” he said.
• An appraiser then assesses both the insured’s health and the policy itself, allowing potential buyers to determine its unique value.
• Once assessment is complete, buyers make offers that outline the amount they’re willing to pay, along with the terms needed to complete the transaction, such as timing and other conditions that must be confirmed before the sale is finalized.

How many people sell their life insurance policies?

“This is a niche field, but there are buyers and sellers out there,” Milan said.

And the practice is growing, Nicholson said. In 2024, the Life Insurance Settlement Association’s licensed members completed nearly 2,700 life settlement transactions totaling more than $600 million paid to consumers. The market is now regulated in 43 states and covers about 90% of the U.S. population, he said.

Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at [email protected] and  subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.