Can I Sell My Term Life Policy for Cash?

A life settlement allows policyholders to sell their term life insurance policy for cash. This transaction involves transferring policy ownership to a third party in exchange for an immediate cash payment, offering an alternative to lapsing or surrendering coverage.

Understanding Life Settlements

A life settlement is the sale of an existing life insurance policy to a third party for a cash sum. This sum is typically greater than the policy’s cash surrender value but less than its full death benefit. The new owner, often a life settlement provider, assumes responsibility for all future premium payments and receives the death benefit when the insured passes away.

Participants include the policyholder (seller) and a life settlement provider (buyer). A life settlement broker may also represent the policyholder and facilitate offers from multiple providers. Providers acquire policies at a discount, pay ongoing premiums, and collect the death benefit to realize a profit.

A life settlement differs from a viatical settlement based on the insured’s health. Viatical settlements apply to individuals who are terminally or chronically ill, typically with a life expectancy of two years or less. Life settlements generally involve policyholders who are not terminally ill, often those aged 65 or older. Viatical settlements often result in a higher percentage of the death benefit payout due to the shorter life expectancy.

Factors Affecting Policy Value

The market value of a term life policy in a life settlement is determined by several criteria. The policyholder’s age and health status directly influence the insured’s life expectancy. A shorter life expectancy leads to a higher offer because the buyer pays premiums for a shorter duration before collecting the death benefit.

The policy’s face amount, or death benefit, is another factor. Policies with a larger death benefit are more attractive and can command a higher sale price. Policies with a death benefit of at least $100,000 are typically considered. The remaining term of the policy and ongoing premium costs also influence the offer. Buyers assess these factors to determine their potential return on investment.

Eligibility and Required Information

Eligibility for a life settlement depends on specific criteria related to the policyholder and the policy itself. Most life settlements are for individuals generally aged 65 or older, though younger individuals with significant health impairments may also qualify. The insured’s life expectancy plays a central role; policies for individuals with a shorter life expectancy, often under 15 years, are typically more valuable in the life settlement market.

For the policy, a minimum face value, often $100,000 or more, is commonly required. While permanent life insurance policies are frequently sold, convertible term policies may also qualify if they can be transitioned to permanent coverage. Some non-convertible term policies might be eligible under limited circumstances, depending on the insured’s life expectancy relative to the premium schedule. The policy should also generally be in force for at least two years, with some states requiring up to five years.

Before initiating the life settlement process, the policyholder must gather specific documents and information. This includes the original life insurance policy documents, which provide details such as the policy number, face amount, premium schedule, and any existing cash value. Medical records are also essential, as they allow providers to assess the insured’s health status and estimate life expectancy. A medical records release form, such as a HIPAA authorization, is necessary to facilitate the sharing of this sensitive information.

The Life Settlement Process

Selling a term life policy through a life settlement follows a structured process once eligibility is confirmed and necessary documents are prepared. It begins by contacting a licensed life settlement broker or directly engaging with a life settlement provider. This initial outreach allows the policyholder to understand potential options and confirm preliminary eligibility.

The policyholder submits gathered information and documents, including policy details and medical records, to the prospective buyer or broker. This enables the life settlement provider to conduct due diligence and initiate the underwriting process. Underwriting involves reviewing medical information to generate a life expectancy report, which is a critical component in determining the policy’s value.

Once underwriting is complete, the life settlement provider generates an offer. The policyholder reviews this offer, and negotiation may occur. If an offer is accepted, legal steps to close the sale begin, involving the transfer of policy ownership to the provider and a change of beneficiary. An escrow agent manages the closing, ensuring the secure transfer of policy ownership and funds.

Funding occurs after the transfer of ownership is legally completed and verified by the insurance company. The payment is disbursed to the policyholder, usually via wire transfer or check. Following the sale, the life settlement provider becomes responsible for all future premium payments, relieving the original policyholder of that financial obligation.

Tax Implications of a Life Settlement

Receiving proceeds from a life settlement has specific tax implications that policyholders should understand. The Internal Revenue Service (IRS) generally treats the proceeds in a tiered manner for income tax purposes. The portion representing the return of the policyholder’s basis (cumulative premiums paid) is typically received tax-free.

Any amount received above the basis but up to the policy’s cash surrender value, if applicable, is generally taxed as ordinary income. For term life policies, which typically do not accrue cash surrender value, this component may be minimal or absent. Any remaining proceeds received above the cash surrender value are generally taxed as a capital gain. Consult a qualified tax advisor to understand the specific tax consequences, as individual circumstances and IRS guidance can vary.