Can I Sell My Life Insurance Policy?

Life insurance policies, while providing a death benefit to beneficiaries, can also serve as a financial asset during the policyholder’s lifetime. When a policy is no longer needed or affordable, selling it through a life settlement or viatical settlement can provide immediate cash. This article explores the process, criteria, and implications of such sales.

Understanding Policy Sales

Selling a life insurance policy to a third party is called a life settlement. The policyholder receives a lump sum payment, which is typically more than the policy’s cash surrender value but less than its full death benefit. The buyer, often an institutional investor, assumes responsibility for all future premium payments and receives the death benefit when the insured passes away. This provides immediate liquidity to the policyholder.

A viatical settlement is a distinct transaction for individuals with a life-threatening or chronic illness. It also involves selling the policy for a lump sum, but is intended for those with a shorter life expectancy, often certified by a physician as having two years or less to live. Proceeds are typically higher than the cash surrender value and often cover medical or living costs during a difficult period.

Key parties in these transactions include the policyholder, who sells the policy, and the life settlement provider, a state-licensed company that purchases it. The provider assumes ownership, future premium obligations, and becomes the new beneficiary. Policyholders may also engage a state-licensed life settlement broker. The broker acts as an intermediary, soliciting offers from multiple providers to secure favorable terms for the seller and guiding the policyholder through the process.

Determining Eligibility and Value

Eligibility for a life settlement depends on the policyholder’s age, health, and policy characteristics. Most settlements are for individuals aged 65 or older, or younger individuals with a significant health impairment. Those over 75 may qualify more easily, while those under 65 typically need a life-threatening or terminal diagnosis. A shorter life expectancy increases a policy’s attractiveness to buyers.

Policy type and features also influence eligibility and value. Permanent policies like whole life or universal life are generally suitable due to their cash value accumulation. Convertible term life policies may also qualify if converted to permanent coverage. Policies typically need a face value of at least $100,000, though some buyers prefer $200,000 or more.

Policy valuation considers medical records, gender, and age to estimate life expectancy; a longer life expectancy means more premiums for the buyer, reducing the offer. Current interest rates also influence valuation. The policy’s cash surrender value and any outstanding loans are also assessed. Loan balances typically repay from proceeds. The premium structure also affects investor appeal.

The Sale Process

The sale process begins by engaging a licensed life settlement broker or provider. Choosing a reputable, state-licensed broker helps ensure a transparent and efficient process.

After selecting a broker, the policyholder completes an application form. This form requires personal details, health history, and policy information like its number, face amount, and type. Any outstanding loans or liens must be accurately disclosed. Complete and precise information is important to avoid a reduced offer.

The broker then gathers documentation for underwriting, including medical records and policy documents. Policyholders sign release forms to authorize access to this information. An independent medical expert reviews the medical information to provide a life expectancy estimate.

Once compiled, the broker submits the case to multiple licensed life settlement providers for bids. This competitive process helps secure the most favorable offer. The policyholder, with broker assistance, evaluates these offers to determine the best option. There is no obligation to accept any offer.

Upon accepting an offer, the transaction enters its closing phase. This involves signing a life settlement contract, legally transferring policy ownership to the provider. Funds are typically placed into an escrow account and released to the policyholder within days after the ownership transfer is completed with the insurance company.

Financial and Tax Outcomes

Selling a life insurance policy results in a lump sum payment to the policyholder. This amount is higher than the policy’s cash surrender value but less than its full death benefit. The exact amount depends on factors like the insured’s life expectancy, face value, and market conditions.

Fees and commissions reduce the net proceeds. Brokers typically charge a commission, which can range from a percentage of the gross purchase price to a percentage of the death benefit. Transaction costs, including commissions, can be as high as 30% of the settlement payment, or around 6% of the death benefit in other models. These fees cover the broker’s efforts in finding buyers, negotiating offers, and managing paperwork.

Taxation of life settlement proceeds is tiered, with the portion equivalent to the policyholder’s cost basis (total premiums paid) generally tax-free. Any amount above the cost basis but not exceeding the cash surrender value is typically taxed as ordinary income. Proceeds exceeding both the cost basis and cash surrender value are usually taxed as capital gains. For viatical settlements involving terminally or chronically ill individuals, proceeds are generally exempt from federal income tax under Internal Revenue Code Section 101, provided certain conditions are met. Consulting a qualified tax professional is advisable for specific tax implications.

Other Policy Options

When a life insurance policy no longer aligns with an individual’s needs, several options exist beyond selling it. One alternative is surrendering the policy to the insurer, which terminates coverage and provides the cash surrender value. This amount is typically less than a life settlement.

Policyholders with cash value policies can also take a loan against the accumulated cash value. This provides funds without surrendering the policy or affecting the death benefit, though interest accrues and reduces the net death benefit if not repaid.

Another option is accelerated death benefits, if available. These allow policyholders with a terminal or chronic illness to access a portion of their death benefit directly from the insurer. Unlike a viatical settlement, this is an advance, not a sale, and the policy remains in force with a reduced death benefit.

To cease premium payments while retaining some coverage, converting the policy to a reduced paid-up status is an option. This converts the existing cash value into a smaller, fully paid-up policy, eliminating future premium obligations. These alternatives offer different ways to manage or access policy value, each with distinct financial implications.