At What Age Can You Sell Your Life Insurance Policy?

A life settlement involves selling an existing life insurance policy to a third party. This transaction provides the policyholder with a cash sum greater than the policy’s cash surrender value but less than the full death benefit. It offers an option for individuals who no longer need or can afford their coverage, converting an asset into immediate liquidity. The buyer, often an institutional investor, assumes responsibility for all future premium payments and receives the death benefit when the insured passes away.

Eligibility Criteria for Selling a Policy

Determining eligibility for a life settlement involves several factors, with age being a primary consideration. Most life settlement providers seek policyholders aged 65 or 70 and older. Younger individuals may qualify, especially if they have significant health impairments or a chronic or terminal health condition. This age consideration relates to the buyer’s assessment of life expectancy, as a shorter life expectancy can make a policy more attractive.

The type of life insurance policy also plays a significant role. Permanent life insurance policies, such as whole life, universal life, and variable universal life, are generally eligible. Term life policies are typically not eligible unless they can be converted into a permanent policy.

Another important factor is the policy’s face value, which is the death benefit amount. Buyers usually require policies to have a minimum face value, often ranging from $100,000 to $250,000, though some may consider policies as low as $50,000. The policy’s value is influenced by its death benefit, future premium payments, and the insured’s life expectancy.

The policyholder’s health status directly impacts eligibility and the potential offer amount. Individuals with serious health impairments or chronic conditions are more likely to receive a life settlement offer, as their reduced life expectancy can increase the policy’s value to a buyer. Underwriters review medical history, gender, and age to estimate the insured’s lifespan, a key factor in determining market value.

Furthermore, the policy must have been in force for a certain period, commonly referred to as the seasoning period. This duration is typically between two to five years, preventing anti-fraud issues and ensuring the policy was not acquired solely for immediate resale.

The Life Settlement Process

The process of selling a life insurance policy begins by contacting a licensed professional. Policyholders can engage with a life settlement broker or a life settlement provider. A broker represents the seller and has a fiduciary duty to seek the highest possible offer by marketing the policy to multiple buyers. A life settlement provider directly purchases the policy for their own investment portfolio or on behalf of other investors.

The next step involves gathering and submitting necessary documentation. This includes:
A formal application
Original life insurance policy documents
Premium illustrations
Authorization forms for medical records access

This information enables potential buyers to evaluate the policy and assess the insured’s life expectancy, which is a key component in determining an offer.

After the information is submitted, offers are generated and evaluated. Brokers facilitate competitive bidding among multiple providers to maximize the selling price. Policyholders receive bids and can negotiate terms before deciding whether to accept an offer. The offer amount is generally higher than the policy’s cash surrender value but less than the death benefit.

Upon accepting an offer, the due diligence and closing phase commences. This involves compiling a closing package, which includes:
The life settlement contract
The life expectancy report
A letter of competency confirming the policyholder’s ability to make rational decisions

Policyholders sign change of ownership and change of beneficiary forms to transfer all rights to the buyer. These documents are reviewed and validated by an escrow agent to ensure a smooth and legal transfer.

The final step is receiving the funds. After the policy ownership is officially transferred to the buyer, the agreed-upon lump sum payment is released from escrow to the policyholder. The buyer then becomes responsible for all future premium payments and will receive the death benefit when the insured passes away.

Tax Considerations and Proceeds

Understanding the financial outcome of selling a life insurance policy requires a clear grasp of the proceeds and their tax implications. The lump sum payment is subject to specific tax rules, clarified by the Tax Cuts and Jobs Act of 2017.

The taxation of life settlement proceeds typically follows a three-tiered approach.
The first portion, up to the amount of premiums paid into the policy (cost basis), is generally received tax-free.
The second tier, any proceeds received above the cost basis but up to the policy’s cash surrender value, may be taxed as ordinary income.
The third tier, any amount received in excess of the cash surrender value, is typically taxed as capital gains.

For example, if a policy sells for $200,000, and the policyholder paid $100,000 in premiums with a cash surrender value of $150,000, $100,000 would be tax-free, $50,000 taxed as ordinary income, and $50,000 taxed as capital gains.

There are specific reporting requirements for these transactions. The life settlement provider issues IRS Form 1099-LS, “Reportable Life Insurance Sale,” detailing the amount paid. The original insurance carrier may send Form 1099-SB, providing investment information. These forms help determine tax liability.

A lump sum from a life settlement can affect eligibility for needs-based government benefits like Medicaid. Specialized trusts, such as a special needs trust, may help protect eligibility by sheltering funds. Consulting a qualified tax advisor or financial planner is advisable for personalized guidance on tax implications and financial assistance impacts.