Can I Sell a Life Insurance Policy?

Life insurance is a financial contract providing a sum to beneficiaries upon the insured’s passing, typically involving consistent premium payments for a future death benefit. While designed for long-term security, policyholders may need to access their policy’s value during their lifetime. This article clarifies pathways to leverage a life insurance policy’s worth for immediate financial flexibility.

Exploring Policy Liquidation Options

Policyholders can access their life insurance policy’s value during their lifetime through several options. One common method is utilizing the policy’s cash surrender value, available primarily with permanent policies like whole life or universal life. This value is the accumulated cash within the policy, minus surrender charges. Policyholders receive a lump sum by surrendering the policy to the insurer.

A life settlement involves selling an existing life insurance policy to a third-party investor. The policyholder receives a payment greater than the cash surrender value but less than the full death benefit. The investor assumes ownership, becomes the new beneficiary, and pays future premiums, collecting the death benefit upon the insured’s passing.

A viatical settlement is a specialized life settlement for policyholders facing a terminal or chronic illness. The policy is sold to a third party for a lump sum, often a higher percentage of the death benefit than a standard life settlement due to reduced life expectancy. The investor becomes the policy owner and beneficiary, paying premiums until the insured’s death.

Accelerated death benefits (ADB) allow access to a portion of the policy’s death benefit while living. These are usually policy riders or provisions, providing a payout under specific health conditions. Qualifying conditions include terminal illness, critical illness, or the need for long-term care. Funds received through ADB reduce the eventual death benefit paid to beneficiaries.

Qualifying and Navigating the Sale Process

Understanding eligibility criteria is key for a life or viatical settlement. Most providers seek policies with a face value of at least $100,000, though some prefer $200,000 or more. Permanent policies like whole life and universal life are commonly eligible; convertible term life policies may also qualify if converted to permanent coverage. The policy should have been in force for a minimum of two years, with some states requiring up to five.

The insured’s age and health status play a significant role in determining eligibility and offer amount. For a standard life settlement, policyholders are usually 65 or older, or younger with substantial health impairments. A shorter life expectancy often makes a policy more attractive to buyers. For viatical settlements, the primary qualification is a diagnosis of terminal or chronic illness, typically indicating a life expectancy of 24 months or less. Chronic illness usually means inability to perform at least two activities of daily living.

Once eligibility is established, the sale process for a life or viatical settlement involves several steps. It begins with an inquiry to a licensed life settlement broker or provider. A broker can represent the policyholder and compare offers from various providers to secure the best terms.

After initial contact, the policyholder provides information about the policy and insured. This includes submitting policy documents, like illustrations, and authorizing medical record release. This allows buyers to assess the policy’s value based on the insured’s health and life expectancy.

Upon review, providers present offers. If an offer is accepted, the final stage is closing the transaction. This involves signing a settlement contract and completing paperwork to transfer ownership and beneficiary rights to the buyer. Funds are then disbursed to the policyholder, often through an escrow agent, within weeks once documentation is confirmed.

Understanding Financial and Tax Outcomes

Understanding the financial and tax implications is crucial when considering a life or viatical settlement. Cash proceeds from selling a policy are typically more than its cash surrender value but less than the full death benefit. This lump sum provides immediate liquidity, but its tax treatment is complex and depends on factors.

For federal income tax purposes, life settlement proceeds are taxed in tiers. The portion up to the policyholder’s “cost basis” (total premiums paid) is tax-free as a return of capital. Any amount exceeding premiums paid but less than the cash surrender value is taxed as ordinary income. Proceeds above the cash surrender value are taxed as capital gains, like profits from other asset sales.

Viatical settlements receive favorable tax treatment under federal law, specifically the Health Insurance Portability and Accountability Act (HIPAA) of 1996. Proceeds are tax-exempt if the insured is certified by a physician as terminally ill, defined as having a life expectancy of 24 months or less. For chronically ill individuals, proceeds can also be tax-free if used for qualified long-term care expenses, provided the individual cannot perform at least two activities of daily living.

State tax laws vary; while many align with federal guidelines, some have different rules or conditions for exemptions. Some states might not distinguish between life and viatical settlements for tax purposes, or they may have their own capital gains rates. A lump sum from a settlement could also impact eligibility for certain means-tested government benefits due to asset limits. Consulting a tax professional or financial advisor is recommended to understand specific tax consequences and potential benefit impacts.

Key Considerations for Your Decision

Deciding whether to sell a life insurance policy requires careful consideration. Individuals should assess their financial needs and determine if immediate cash from a settlement is necessary to meet obligations or achieve goals. This evaluation should cover short-term liquidity and long-term financial planning, ensuring the decision supports overall financial well-being.

A significant aspect to consider is the impact on the policy’s original purpose and its beneficiaries. Selling the policy means the death benefit will no longer provide financial support to loved ones. Understanding the implications for dependents or other intended recipients is an important part of this decision-making process.

Before pursuing a sale, explore alternatives to a life or viatical settlement. For policies with cash value, a policy loan may be an option, allowing borrowing against the cash value with interest while keeping the policy in force, though it can reduce the death benefit if not repaid. Policyholders might also reduce the policy’s face amount to lower premium payments. Some insurers offer flexible premium payment options or partial withdrawals from cash value.

Given the complexities, seeking professional advice is recommended. A financial advisor can help evaluate if a settlement aligns with financial objectives. A tax professional can provide guidance on tax implications, which vary by circumstances and state laws. An attorney can ensure legal aspects are handled, protecting policyholder interests.