Can I Sell My Term Life Insurance Policy?

Term life insurance policies provide coverage for a specific period, offering financial protection to beneficiaries if the insured passes away within that timeframe. While many believe these policies only provide a death benefit, a term life insurance policy can sometimes be a financial asset that its owner can sell. This article explores the process, financial implications, and alternatives for selling a term life insurance policy.

Understanding Life Settlements

Selling a term life insurance policy is possible through a financial transaction known as a life settlement. This involves selling an existing life insurance policy to a third party for a cash sum. The amount received is typically more than any cash surrender value the policy might have but less than the full death benefit. Life settlements offer a way for policyholders to access a portion of their policy’s value while they are still living.

Eligibility for selling a term life policy often depends on its features, especially if it is a convertible term policy. A convertible term policy allows the policyholder to convert it into a permanent life insurance policy, such as whole life or universal life, without needing a new medical examination. This conversion option makes the policy more appealing to potential buyers in the life settlement market.

While pure term policies are generally less likely to qualify due to their lack of cash value accumulation, a non-convertible term policy might still be considered if the insured has a significant life-limiting health condition. Beyond the policy type, the policyholder’s age and health are significant factors in determining eligibility. Most life settlement transactions involve individuals aged 65 or older, though younger individuals with serious or chronic health conditions may also qualify.

Additionally, the policy’s face value typically needs to be $100,000 or more to be considered for a life settlement. Policyholders consider selling their policies for various reasons, including no longer needing the coverage or finding it difficult to afford the increasing premiums. Others may seek to use the funds for medical expenses, long-term care, or to supplement retirement income.

It is important to distinguish a standard life settlement from a viatical settlement. Viatical settlements are specifically for individuals with a terminal or chronic illness, often with a life expectancy of 24 months or less.

Navigating the Life Settlement Process

The life settlement process begins by contacting a licensed life settlement provider or broker. A broker represents the seller’s interests, seeking offers from multiple buyers to secure the best possible value for the policy. These professionals guide the policyholder through the transaction.

The initial inquiry gathers essential information about the policy and the policyholder’s medical history. This includes details like the insurer, policy number, death benefit, premium schedule, and issue date. Comprehensive medical records are also required to assess health status.

The policy then undergoes valuation and medical underwriting. Buyers assess the policy’s worth based on future premium costs and the policyholder’s estimated life expectancy. Independent underwriters review medical records to provide an actuarial estimate of lifespan, influencing the offer amount.

Once valuation is complete, lump-sum cash offers are presented. Evaluate each offer carefully, considering the amount, fees, and the buyer’s or broker’s reputation. Negotiation may be possible.

Upon accepting an offer, the process moves to documentation and transfer of ownership. This stage involves paperwork, including consent forms, assignment of ownership, and beneficiary changes. The new owner assumes responsibility for future premium payments and receives the death benefit.

The final steps involve funding and closing the transaction. Funds are placed into an escrow account until all transfer documents are processed and the insurer acknowledges the change of ownership. Once confirmed, funds are released to the seller. The entire process typically takes 6 to 8 weeks. Many states also impose a waiting period, usually two to five years from the policy’s issue date, before a policy can be sold.

Financial and Tax Considerations

The cash proceeds received from a life settlement are typically more than any cash surrender value but less than the full death benefit. The exact amount a policyholder receives is influenced by factors including life expectancy, remaining premium payments, and market demand. These variables create a dynamic valuation, ensuring that each offer reflects the unique characteristics of the policy and the insured.

The taxation of life settlement proceeds for the seller is governed by federal tax laws, notably clarified by IRS guidance. Generally, proceeds are divided into three tiers for tax purposes. The portion equal to total premiums paid (cost basis) is typically tax-free. Any amount exceeding the cost basis but less than the policy’s cash surrender value is generally taxed as ordinary income. For pure term policies, which do not build cash value, the gain above the adjusted cost basis is typically taxed as capital gains. Finally, any amount exceeding the policy’s cash surrender value is taxed as a capital gain. Consult a qualified tax professional to understand specific tax obligations.

Viatical settlements, for terminally or chronically ill individuals with a life expectancy of 24 months or less, receive different tax treatment. Under federal law, proceeds from a qualified viatical settlement are generally tax-free. This tax exemption provides significant financial relief for individuals facing severe health challenges.

Receiving a lump sum from a life settlement can also have implications for eligibility for certain government benefits. Programs like Medicaid or Supplemental Security Income (SSI) are means-tested, meaning eligibility is based on income and asset limits. A substantial cash payout could potentially push an individual’s assets above these limits, affecting their eligibility.

Considering Other Options for Your Policy

If selling a term life insurance policy through a life settlement is not feasible or desired, several other options are available to policyholders. One straightforward approach is simply allowing the policy to lapse. This occurs when the policyholder stops paying premiums, which results in the termination of the coverage and no cash payout. This option provides no financial return but eliminates future premium obligations.

Another alternative, if the term policy has any accumulated cash value, is surrendering the policy to the insurer. While pure term life insurance typically does not build cash value, this option could be relevant if the policy was converted from a permanent type or if it’s a specific type of term policy with a cash component. Upon surrender, the insurer pays the policyholder the cash surrender value, which is usually minimal for term policies.

For policyholders with convertible term life insurance, an appealing option is to convert the policy into a permanent life insurance plan, such as whole life or universal life. This conversion allows the policyholder to secure lifelong coverage without undergoing a new medical examination or extensive underwriting. Permanent policies accumulate cash value over time, which can then be accessed through withdrawals or loans in the future.

Some life insurance policies include accelerated death benefits or living benefits riders. These riders allow policyholders to access a portion of their death benefit while still living, typically under specific circumstances such as a terminal illness, chronic illness, or critical illness diagnosis. Utilizing such a rider provides immediate funds but reduces the amount that will eventually be paid out to beneficiaries upon the insured’s passing.