Can I Sell My Life Insurance Policy?

Life insurance policies, traditionally a financial safeguard for beneficiaries, can also function as a transferable asset during the policyholder’s lifetime. Individuals may sell their existing life insurance coverage, converting its future death benefit into immediate cash. This option provides liquidity for those whose financial needs or priorities have shifted since the policy’s inception.

Understanding Life Policy Sales

Selling a life insurance policy typically occurs through a life settlement. This involves selling an existing policy to a third-party investor for a cash sum. The policyholder receives an amount greater than the policy’s cash surrender value (the amount the insurer would pay if canceled) but less than the full net death benefit. The buyer assumes responsibility for all future premium payments, becoming the new owner and beneficiary, and ultimately receives the death benefit when the insured dies.

A viatical settlement is a specific type of life settlement for policyholders who are terminally or chronically ill, often with a life expectancy of two years or less. This option provides liquidity for policyholders who no longer need, can no longer afford, or wish to use the asset for current expenses like long-term care or medical costs. It offers an alternative to lapsing a policy or surrendering it for a lower cash value.

Policy and Policyholder Eligibility

For a life insurance policy to be sold in the secondary market, both the policy and policyholder must meet certain criteria. Permanent life insurance types, such as universal life and whole life policies, are commonly eligible because they build cash value. Convertible term life policies may also qualify if they can transition into permanent coverage. Policies typically need a minimum face value of $100,000 or more to attract buyers and should generally have been in force for at least two years.

Policyholder eligibility revolves around age and health. For a standard life settlement, policyholders are typically 65 years or older, as an older age implies a shorter life expectancy, making the policy more appealing. Younger policyholders may qualify if a significant health impairment substantially reduces their life expectancy. For viatical settlements, the policyholder must have a terminal or chronic illness. Medical underwriting, including a review of health records, is standard to assess the insured’s life expectancy accurately.

The Sale Process

Initiating the sale of a life insurance policy begins by contacting a licensed life settlement broker or provider. These entities facilitate the transaction between the policyholder and potential buyers. A broker represents the policyholder’s interests, seeking offers from various providers, while a provider may directly purchase the policy. The policyholder completes an application detailing their policy’s type, face amount, premiums, and cash value.

After the application, the policyholder grants permission for the broker or provider to access medical records and policy information. This includes signing medical release forms and authorizations to contact the insurance company. This documentation is crucial for medical underwriting, where independent experts review the insured’s health history to estimate life expectancy. This assessment is a primary factor in determining the policy’s market value.

Once information is gathered, the policy is presented to potential buyers, who generate offers. These offers are based on factors including estimated life expectancy, policy characteristics, and expected future premium costs. The policyholder reviews the offers received and chooses whether to accept one; there is no obligation to accept any offer.

If an offer is accepted, the transaction moves to closing. This involves preparing and signing a comprehensive package of documents, including a purchase agreement, transfer-of-ownership forms, and beneficiary designations. An escrow agent often manages this stage, ensuring legal requirements are met and funds are securely held.

The policy’s ownership and beneficiary rights are formally transferred to the buyer with the insurance company. The lump-sum payment is then released from escrow to the policyholder, usually within a few business days after transfer confirmation.

Financial and Tax Implications

The financial amount a policyholder receives from selling a life insurance policy is influenced by several factors. The policy’s face value, or death benefit, is a primary consideration, with higher death benefits leading to larger payouts. The policyholder’s health and estimated life expectancy play a significant role; a shorter life expectancy means the buyer pays premiums for a shorter period, increasing the policy’s value. The policy type also matters, with permanent policies like whole or universal life often being more valuable than term policies due to their guaranteed nature and cash value accumulation.

Future premium costs are also factored into the valuation, as the buyer assumes responsibility for these payments. Policies with lower ongoing premiums relative to the death benefit are more attractive. While a life settlement payout is typically much higher than the policy’s cash surrender value, it will always be less than the death benefit. Payouts can range from 10% to 25% of the policy’s death benefit, potentially higher depending on specific factors. Fees and commissions, such as those paid to brokers, will reduce the net proceeds.

Regarding taxation, life settlement proceeds are generally subject to federal income tax, unlike a death benefit. The Internal Revenue Service (IRS) applies a tiered approach. The portion equal to the policyholder’s cost basis (total premiums paid, less withdrawals or dividends) is usually tax-free as a return of capital.

Any amount above the cost basis but up to the policy’s cash surrender value is generally taxed as ordinary income. Proceeds exceeding the cash surrender value are typically taxed as long-term capital gains if the policy was held for over one year. For instance, if a policyholder paid $30,000 in premiums (cost basis), the policy has a cash surrender value of $50,000, and it sells for $80,000, then $30,000 is tax-free, $20,000 ($50,000 – $30,000) is taxed as ordinary income, and $30,000 ($80,000 – $50,000) is taxed as a capital gain. Viatical settlements for the terminally or chronically ill are generally tax-free under federal law. Consulting a qualified tax professional is advisable to understand specific tax implications.