Can a Term Life Insurance Policy Be Sold?

Life insurance policies are often held until maturity or lapse. Many policyholders believe their options are limited to continuing premium payments or letting coverage end without value. However, a term life insurance policy can be sold. This can provide liquidity for policyholders whose needs or financial situations have changed.

Understanding Term Life Policy Sales

A term life insurance policy can be sold through a life settlement. This process involves the policy owner selling their policy to a third-party investor for a lump-sum payment. The buyer assumes ownership, becomes the new beneficiary, and is responsible for all future premium payments. Upon the insured’s passing, the new owner receives the death benefit.

The payment received by the original policyholder is typically more than the policy’s cash surrender value, if any, but less than the full death benefit. This provides an alternative to letting a policy lapse or surrendering it for a lower payout. Life settlements are distinct from viatical settlements, which are for individuals with a terminal or chronic illness, generally with a life expectancy of two years or less. While both involve selling a policy, life settlements usually apply to older policyholders or those with a significant health decline, seeking funds for various needs.

Qualifying for a Policy Sale

Eligibility for selling a term life policy depends on several factors related to the policyholder and the policy. Policyholders are typically aged 65 or above, or may have a significant health decline that impacts their life expectancy. A shorter life expectancy, generally estimated to be under 15 years, makes a policy more appealing to investors as it reduces the period they must pay premiums before receiving the death benefit.

The type of term life policy also plays a role. Convertible term policies, which allow conversion to a permanent policy, are often more readily eligible for a life settlement. Non-convertible term policies may still qualify, particularly if the insured has a life-limiting condition.

Policies typically need a face value of $100,000 or more to be viable for a settlement. The policy generally needs to have been in force for a minimum period, often two to five years, depending on state regulations. Clear policy ownership and the ability to change beneficiaries are also prerequisites.

The Policy Sale Process

The process typically begins by engaging a licensed life settlement broker or provider. A broker represents the policyholder and seeks offers from multiple buyers, aiming to secure the best value for the policy. A provider directly purchases policies, either for their own investment portfolio or on behalf of other investors. Working with a broker can often lead to a more competitive bidding environment and potentially higher offers.

The next step involves submitting detailed information and documentation to the chosen broker or provider. This typically includes policy details, such as the face value, premium schedule, and any riders, along with authorization forms for the release of medical records. Medical history and current health information are crucial for underwriters to estimate the insured’s life expectancy, which influences the policy’s value to potential buyers. After reviewing the submitted information, the broker or provider appraises the policy and solicits offers from institutional buyers.

Upon receiving offers, the policyholder can review and accept the most suitable one. A due diligence phase follows, where the buyer verifies the submitted medical and policy information. This stage ensures accuracy and validates the terms of the proposed settlement.

Once an offer is accepted, the legal steps involve signing a purchase agreement and completing forms for the transfer of policy ownership and beneficiary designation to the new owner. Upon successful transfer of the policy, the agreed-upon lump sum payment is disbursed to the seller, often held in an escrow account until the transfer is complete.

Financial Aspects of Selling a Policy

The amount a policyholder receives is influenced by several financial factors. The policy’s face value, the insured’s life expectancy, and the cost of future premiums are primary considerations for buyers. Policies with higher face values and shorter life expectancies, which translate to fewer premium payments for the buyer, generally command higher offers. Current market demand for life settlements also plays a role in determining the sale value.

Payouts often range from 10% to 25% of the policy’s face value, though this can vary widely based on individual circumstances. Some sources indicate payouts can be four or more times the cash surrender value. Various costs and fees are incurred during a life settlement transaction, which reduce the net payout to the seller. These may include broker commissions, typically a percentage of the sale price, as well as administrative and legal fees.

Proceeds from a life settlement may have tax implications for the seller. The Internal Revenue Service generally views life settlement proceeds as taxable income. The portion of the payout equal to the policy’s cost basis (total premiums paid) is usually received tax-free.

Any amount received above the cost basis but below the policy’s cash surrender value (if applicable) may be taxed as ordinary income. Amounts exceeding the cash surrender value are typically treated as capital gains. Policyholders should consult a qualified tax professional for personalized advice, as tax rules can be complex.