Can I Sell My Whole Life Insurance Policy?

Whole life insurance provides lifelong coverage and includes a cash value component that grows over time. Policyholders may need to access its value during their lifetime. One such option involves selling the whole life insurance policy, a process known as a life settlement. This allows policyholders to convert their policy into a cash sum, an alternative to surrendering it.

Understanding Life Settlements

A life settlement involves the sale of an existing life insurance policy to a third-party investor for a cash sum. This amount is greater than the policy’s cash surrender value but less than its full death benefit. The buyer, often an institutional investor, assumes ownership of the policy, takes over all future premium payments, and ultimately receives the death benefit when the insured passes away. This transaction creates a secondary market for life insurance policies, providing an option for policyholders who no longer need or can afford their coverage.

A life settlement differs from a viatical settlement based on the insured’s health status. Viatical settlements are specifically for individuals with a terminal or chronic illness, generally those with a life expectancy of two years or less. Viatical settlement proceeds are often tax-exempt. Life settlements, conversely, are for policyholders who are not terminally ill, often those aged 65 or older with a life expectancy exceeding two years.

Determining Policy Eligibility and Value

Not all whole life insurance policies are suitable or valuable enough for a life settlement. Several factors influence a policy’s eligibility and its potential sale value in the secondary market. Age is a significant consideration, with most buyers focusing on individuals aged 65 or older. Older policyholders are more attractive because buyers anticipate paying premiums for a shorter duration.

Health status also plays a crucial role. A declining health condition or the presence of certain medical conditions that shorten life expectancy can significantly increase a policy’s value. This is because a shorter life expectancy means the investor will incur fewer premium payments over time. The policy’s death benefit amount is another factor; policies with a face value of at least $100,000 are more appealing.

The cost of premiums affects attractiveness, as higher payments reduce the investor’s net return. Policies with lower premiums relative to their death benefit tend to be more valuable. Whole life policies are well-suited for life settlements due to their cash value and guaranteed benefits. Buyers are interested in policies that offer predictable returns, making permanent policies like whole life insurance strong candidates.

The Life Settlement Process

Policyholders typically begin by contacting a life settlement broker or provider. This initial inquiry involves providing basic policy and health information. The policyholder then submits documentation, including detailed policy information and authorization for medical records access. This step is crucial for the buyer to perform medical underwriting and assess the insured’s life expectancy.

After document submission, the buyer conducts a review, including an independent medical evaluation to estimate life expectancy. This assessment determines the policy’s market value. Potential buyers then submit offers. Policyholders commonly receive multiple offers for comparison.

If an offer is accepted, the closing process begins with preparing a closing package. This package includes a contract, a life expectancy report, and a letter confirming competency. Legal transfer of policy ownership and beneficiary designation to the buyer is then completed with the insurance company. Upon transfer, settlement funds are released from escrow and paid to the policyholder, typically within days.

Tax Considerations for Policy Sales

Proceeds from selling a whole life insurance policy through a life settlement have specific tax implications. The portion of the payout representing a return of premiums paid is generally tax-free. This amount is viewed as a return of the policyholder’s cost basis.

Any amount exceeding the cost basis but less than the cash surrender value may be taxed as ordinary income. This portion is considered the accumulated interest or gains within the policy’s cash value. Any proceeds above the cash surrender value are taxed as capital gains. This tiered tax treatment reflects the various components of the policy’s value and the nature of the gain. Consulting a qualified tax professional is advisable to understand individual tax liability.

Other Options for Your Whole Life Policy

Selling a whole life insurance policy is one way to access its value; other alternatives may align better with financial goals. One option is to cash surrender the policy, terminating it for its cash surrender value. This amount is the accumulated cash value minus any surrender charges or outstanding loans. However, the cash surrender value is often less than a life settlement, especially if surrendered early.

Another alternative is a policy loan against the cash value. Policy loans do not require a credit check and the interest rates are often competitive. The loan amount, up to 90% of the cash value, reduces the death benefit if not repaid before the insured’s passing. Interest accrues on the loan, and if it is not managed, it can erode the policy’s cash value and potentially cause the policy to lapse.

Policyholders also have non-forfeiture options to continue coverage without paying full premiums. The reduced paid-up option uses the cash value to purchase a smaller, fully paid-up whole life policy. This means no further premiums are due, but the death benefit is permanently reduced. The extended term option uses the cash value to purchase a term life policy for the original death benefit amount, but for a limited period. This option eliminates future premium payments but eventually results in the termination of coverage.