Can I Sell My Term Life Insurance Policy?

Term life insurance policies provide coverage for a specific period, offering a death benefit to beneficiaries if the insured passes away within that term. Unlike permanent life insurance, term policies do not build cash value. Policyholders can sell their term life insurance policies through a life settlement, converting an unneeded or unaffordable policy into a lump sum of cash.

Life Settlements Explained

A life settlement involves selling an existing life insurance policy to a third party. The seller receives a cash payment that is more than the policy’s cash surrender value, if any, but less than the full death benefit. The buyer, often an institutional investor, becomes the new owner, assumes responsibility for future premium payments, and receives the death benefit when the insured dies. This arrangement allows investors to gain a return on their investment when the policy matures.

This financial mechanism provides an alternative to letting a policy lapse or surrendering it for a lower cash value. Life settlements are distinct from viatical settlements, which are for individuals with a life expectancy of two years or less due to a terminal or chronic illness.

Qualifying for a Life Settlement

A term life insurance policy’s eligibility for a life settlement depends on several factors. The insured’s age is a consideration, with most settlements involving individuals aged 65 or older. Younger individuals with significant health impairments may also qualify.

The insured’s health status plays a role, particularly if health has declined since the policy was issued. A reduced life expectancy makes a policy more attractive to buyers. For term policies, eligibility often hinges on whether the policy can be converted to a permanent life insurance policy, as this provides long-term certainty for the buyer. Policies typically need a death benefit of $100,000 or more. The policy generally needs to have been in force for at least two years, with some states requiring up to five years.

Steps to Selling Your Policy

Initiating a life settlement begins with gathering policy information, including original documents and medical records. This information is essential for potential buyers to assess the policy. Policyholders then engage with either a licensed life settlement broker or a life settlement provider. A broker represents the seller, working to secure the best offer from various providers, while a provider directly purchases policies.

Once an application is submitted, including personal details, policy specifics, and medical history authorizations, the policy undergoes an underwriting process. This involves a review of the insured’s medical records and an assessment of their life expectancy by the buyer. After this evaluation, the policyholder may receive offers from interested buyers. If an offer is accepted, the closing process involves transferring policy ownership and beneficiary designation to the buyer, often facilitated through an escrow account to ensure secure fund disbursement. The entire process, from application to funding, can take a few months.

How Policy Value is Determined

The cash payout from a life settlement is influenced by several factors. The insured’s life expectancy is a determinant; a shorter projected life span results in a higher offer because the investor anticipates paying fewer premiums and receiving the death benefit sooner. The policy’s death benefit also directly impacts value, with higher death benefits leading to larger settlement amounts.

The amount and frequency of future premiums the buyer will need to pay are also factors; lower future premium obligations make a policy more appealing and increase the potential offer. For term policies, the ability to convert to a permanent policy can enhance its value, as it ensures long-term coverage for the buyer. Current interest rates and the policy’s internal cost of insurance further influence the valuation.

Tax Implications of a Sale

The proceeds from a life settlement are subject to specific tax rules, which can vary based on the policy’s characteristics and the seller’s individual circumstances. The portion of the sale proceeds up to the cost basis (the total premiums paid into the policy) is considered a return of capital and is not taxable. This means the initial investment is recovered tax-free.

Any amount received that exceeds the cost basis but is less than the policy’s cash surrender value, if any, is taxed as ordinary income. If the policy was a convertible term policy that built no cash value, or if the proceeds exceed any cash surrender value, the remaining amount is taxed as a capital gain. Consult with a tax professional or financial advisor before entering into a life settlement to understand the precise tax consequences for your situation.