Can I Sell a Term Life Insurance Policy?

Term life insurance provides coverage for a specific duration, typically ranging from 10 to 30 years. It is a contract where regular premiums are paid in exchange for a death benefit, which is then provided to beneficiaries if the insured passes away within the policy term. A term life insurance policy can hold value beyond its death benefit, presenting options for policyholders who no longer need or can afford the coverage.

Options for Selling a Term Life Policy

Policyholders whose needs or financial situations have changed may find opportunities to sell their policies. This process often involves two primary mechanisms: life settlements and viatical settlements. Both options allow policyholders to receive a lump sum of cash for their policy, providing an alternative to letting it lapse or surrendering it for little to no value. In both types of settlements, the policy is sold to a third party who assumes responsibility for all future premium payments and receives the death benefit when the insured passes away.

A life settlement involves the sale of an existing life insurance policy to a third-party investor for a cash sum. This amount is typically greater than any cash surrender value the policy might have accumulated, but it will be less than the full death benefit. Policyholders often consider a life settlement when they no longer require the coverage, find the premium payments unaffordable, or wish to access capital for other financial needs, such as retirement planning or unexpected expenses.

Eligibility for a life settlement depends on several factors, including the policyholder’s age, health status, and the policy’s characteristics. Most life settlement companies prefer policyholders who are at least 65 years old, though younger individuals with health impairments may also qualify. The policy should typically have a face value of $100,000 or more, with some buyers preferring policies exceeding $200,000 or $250,000. Additionally, the policy usually needs to have been in force for at least two to five years, depending on state regulations.

While permanent life insurance policies are commonly sold in life settlements, term life policies can also qualify, particularly if they are convertible to a permanent policy. A convertible term policy includes a rider that allows conversion to a whole or universal life policy without requiring a new medical exam. Non-convertible term policies may also be considered, especially if the insured has a life-limiting condition or if the policy is nearing its end but has a high death benefit and is likely to be renewed.

A viatical settlement is a specific type of life settlement designed for policyholders who are terminally or chronically ill. The distinguishing factor is the insured’s health condition and a shortened life expectancy, typically two years or less. This option provides immediate cash that can be used to cover medical expenses, hospice care, or other pressing financial needs during a difficult time. For viatical settlements, age is less of a determining factor than the severity of the illness and the estimated life expectancy. Individuals of any age may qualify if they meet the health criteria. The payout percentage for viatical settlements is often higher than for life settlements due to the shorter life expectancy, which means a quicker return for the investor.

The Process of Selling Your Policy

Initiating the process of selling a term life insurance policy typically begins by contacting a licensed life settlement broker or a direct provider. A broker, acting on behalf of the policyholder, often submits the policy to multiple licensed buyers to generate competitive offers.

The policyholder must then compile and provide a comprehensive set of information and documentation for evaluation. This includes detailed medical records, which are used by buyers to assess the insured’s health status and estimate life expectancy. Specific policy details, such as the policy number, the issuing insurance carrier, the policy’s face amount, and the current premium schedule, are necessary. Personal identification documents are also required to verify the policyholder’s identity and ensure compliance with regulatory standards.

With the necessary documentation, the broker or provider proceeds with a policy appraisal. This evaluation considers the policyholder’s health, age, and the policy’s terms to determine its market value. The policy is then presented to a network of institutional buyers, who may submit competitive offers based on their assessment of the policy as an investment. The aim is to solicit a range of bids, allowing the policyholder to select the most advantageous offer available.

Once a suitable offer is accepted, the transaction progresses to the closing phase. This involves the execution of a formal settlement contract, which legally outlines the terms of the sale. A neutral third-party escrow agent is then engaged to hold the agreed-upon funds securely. The escrow agent ensures that the funds are protected until all conditions of the sale, including the formal transfer of policy ownership and the update of the beneficiary designation to the buyer, are satisfied. The escrow agent releases the lump sum payment to the seller only after the insurance carrier officially records the change of ownership and beneficiary.

Financial and Tax Considerations

The cash received from selling a term life insurance policy is provided as a lump sum payment. This amount is higher than any cash surrender value the policy might have, yet it will always be less than the policy’s full death benefit. The exact amount received is determined by various factors, including the insured’s life expectancy, the policy’s face value, and the ongoing premium costs.

The taxation of these proceeds varies based on the type of settlement and the policyholder’s health status. For a life settlement, the proceeds are generally subject to a three-tiered tax structure as per IRS guidelines. The portion of the proceeds up to the policy’s cost basis is received tax-free. The cost basis represents the cumulative amount of premiums paid into the policy by the policyholder.

Any amount received above the cost basis, but not exceeding the policy’s cash surrender value, is taxed as ordinary income. Since term life policies typically do not accumulate cash value, this tier is often bypassed, and any gains beyond the cost basis are generally treated as capital gains. The remaining proceeds, which exceed both the cost basis and any cash surrender value, are taxed as long-term capital gains, assuming the policy has been held for over one year.

In contrast, viatical settlements often receive more favorable tax treatment. Under the Health Insurance Portability and Accountability Act of 1996, proceeds from a viatical settlement are generally tax-free at the federal level if the policyholder is certified by a physician as terminally ill, with a life expectancy of 24 months or less, or chronically ill. This tax exemption treats the payment as an accelerated death benefit rather than taxable income.

Receiving a lump sum from a policy sale could also affect eligibility for certain means-tested government benefits, such as Medicaid. Medicaid has strict income and asset limits, and a large influx of cash might push a recipient over these thresholds, potentially leading to a temporary or permanent loss of benefits. Policyholders considering a sale should consult with a financial advisor or tax professional to understand the specific implications for their individual financial situation and benefit eligibility.