Can I Sell My Life Insurance Policy for Cash?

Life insurance policies, traditionally viewed as instruments for future financial protection, can also hold a present-day market value. For policyholders who find themselves no longer needing their coverage, or facing unaffordable premiums, the option to sell their policy for cash becomes a consideration. This transaction allows individuals to unlock a portion of their policy’s value while still living, providing a lump sum that can address various financial needs. Exploring this path involves understanding specific financial arrangements and their implications.

Understanding Life Settlements and Viatical Settlements

A life settlement involves selling an existing life insurance policy to a third party for a cash sum. This payment is typically greater than the policy’s cash surrender value but less than its full death benefit. The buyer, often an institutional investor, becomes the new owner of the policy, assumes responsibility for future premium payments, and receives the death benefit when the insured individual passes away. This arrangement offers policyholders a way to access liquidity from an asset they no longer need or can afford to maintain.

A viatical settlement is a specific type of life settlement tailored for individuals who are terminally or chronically ill. In this scenario, the policyholder sells their life insurance policy for immediate cash, often to cover medical expenses or improve their quality of life. A key distinction for a viatical settlement is the insured’s life expectancy, which is generally two years or less for terminally ill individuals.

While both life and viatical settlements involve selling a life insurance policy to a third party, the primary difference lies in the insured’s health status and life expectancy, which also impacts tax treatment.

Determining Eligibility and Policy Suitability

Eligibility for a life or viatical settlement depends on several factors related to both the policyholder and the policy itself. For a life settlement, policyholders are generally considered candidates if they are 65 years or older, though younger individuals with significant health impairments may also qualify. A declining health status, even if not terminal, can increase a policy’s value in the settlement market. The face value of the life insurance policy typically needs to be at least $100,000 or more to be considered.

Regarding policy type, permanent life insurance policies such as whole life and universal life are generally suitable because they accumulate cash value. Convertible term policies may also qualify if they can be converted to permanent coverage, while non-convertible term policies are generally not eligible. The policy should also have been in force for a minimum period, often at least two years, with some states requiring longer periods like five years.

For viatical settlements, the primary requirement is a certification from a licensed healthcare practitioner that the insured individual is terminally ill, typically with a life expectancy of 24 months or less. A chronically ill individual may also qualify if certified as unable to perform certain daily activities or requiring substantial supervision due to cognitive impairment. To assess eligibility, a policyholder will need to provide detailed information including policy specifics and medical records, often requiring medical release forms and physician statements.

The Process of Selling Your Policy

Selling a life insurance policy begins with an initial inquiry to a life settlement provider or a life settlement broker. A broker represents the policyholder and can shop for offers from multiple providers, potentially securing a more competitive payout. Providers are the companies that directly purchase the policies.

Once contact is established, the policyholder typically completes an application and authorizes the release of medical records and policy information. This documentation allows the provider or broker to conduct an appraisal, evaluating the policy’s market value based on factors such as the insured’s life expectancy, the policy’s death benefit, and future premium costs.

Following the appraisal, the policyholder may receive one or more offers to purchase the policy. If an offer is accepted, the transaction proceeds to the closing phase. This involves the formal assignment of the policy ownership to the buyer and a change of beneficiary to the new owner. The buyer then assumes responsibility for all future premium payments.

Financial and Tax Considerations

The amount received from selling a life insurance policy is determined by several factors, including the policy’s death benefit, the insured’s life expectancy, the cost of future premiums, and the policy’s cash surrender value. The settlement amount will always be more than the cash surrender value but less than the full death benefit. On average, life settlements can yield a lump sum payment that is typically three to five times greater than the policy’s cash surrender value.

The tax implications of receiving a life settlement can be complex and vary based on the policyholder’s specific circumstances. Generally, the proceeds from a life settlement are subject to a three-tiered tax structure. The portion of the settlement equal to the policyholder’s cost basis is typically received tax-free. Any amount received above the cost basis, up to the policy’s cash surrender value, is generally taxed as ordinary income. Finally, any remaining proceeds received above the cash surrender value are usually taxed as long-term capital gains.

For viatical settlements, the tax treatment is often more favorable. Proceeds from a viatical settlement are generally tax-free under federal law if the insured is certified as terminally ill (life expectancy of 24 months or less) or chronically ill, provided specific IRS requirements are met. For chronically ill individuals, specific usage requirements apply for tax-free status. It is important to consult with a tax professional to understand the specific tax consequences, as state tax laws can also apply and vary. Once a policy is sold, the original beneficiaries will no longer receive a death benefit, as ownership and beneficiary rights transfer to the buyer.