Can You Sell a Life Insurance Policy?

It is possible to sell a life insurance policy, converting it into a liquid asset. This allows individuals to address changing financial circumstances or needs. A life insurance policy, whether term or permanent, is considered personal property, allowing its ownership to be transferred. This option unlocks value from a policy that may no longer serve its original purpose.

Understanding Policy Sales

Policyholders typically sell their life insurance through one of two transactions: a life settlement or a viatical settlement. Both involve selling the policy to a third-party buyer for a cash payment. These transactions allow individuals to receive a lump sum greater than the policy’s cash surrender value but less than its full death benefit.

A life settlement involves selling a policy when the individual no longer needs or can afford the coverage. The buyer, often an investor, takes over premium payments and receives the death benefit when the insured passes away. This option is generally available for policyholders over 65, who may or may not have a serious health condition.

A viatical settlement is for policyholders facing a terminal or chronic illness. To qualify, the insured usually has a limited life expectancy, often two years or less. This settlement provides critically ill individuals with immediate funds for medical expenses or to improve their quality of life. The distinction between a life settlement and a viatical settlement lies in the insured’s health status and life expectancy, with viatical settlements catering to those with severe health conditions.

Eligibility and Valuation Factors

Several factors determine a life insurance policy’s eligibility for sale and how its potential value is assessed by buyers. Permanent life insurance policies, such as whole life or universal life, are generally more attractive for sale due to their cash value accumulation and longer coverage duration. Convertible term life policies, which can be changed into permanent coverage, may also be eligible, particularly if they have a conversion rider.

The insured’s health status and age determine a policy’s market value. Buyers are interested in how soon they can expect to receive the death benefit. An older age (often above 65) and health conditions that reduce life expectancy increase a policy’s attractiveness and potential payout. A shorter life expectancy makes the policy more appealing to buyers, as their return on investment is realized sooner.

Policy valuation considers several elements beyond age and health. The policy’s face value (death benefit) is a primary component, as it is the amount the buyer will ultimately receive. Current premium costs and the remaining premium schedule also play a role, representing ongoing expenses for the buyer. Prevailing interest rates also influence the present value of the future death benefit. Buyers assess these factors to determine an offer that provides them with an acceptable rate of return on their investment.

The Policy Sale Process

Selling a life insurance policy involves a structured process, beginning with preparation and culminating in the transfer of ownership and funds. Before approaching buyers or brokers, policyholders should gather essential policy documents. This includes the policy declarations page, outlining coverage details, premium schedules, and riders. Comprehensive medical records are also necessary, as buyers use them to assess the insured’s health and life expectancy.

Engaging with a life settlement broker or provider is a key step. A life settlement broker acts as an intermediary, shopping the policy to various providers to secure competitive offers. Providers purchase policies directly. Research and select a reputable firm, as they will guide the policyholder through the transaction.

Once initial information is submitted, the provider or broker will initiate due diligence. This includes medical underwriting, where they review health records and may request additional medical examinations or physician statements. Based on this assessment, policy offers will be presented to the policyholder. Negotiations may occur to achieve an agreeable price.

Upon offer acceptance, the closing phase begins, involving signing legal documents to transfer policy ownership to the buyer and change the beneficiary designation. Finally, the funds are disbursed to the policyholder, and the buyer assumes responsibility for future premium payments.

Tax Considerations

Proceeds from selling a life insurance policy through a life or viatical settlement can have tax implications. The cash payout may be subject to income tax. The taxable portion is determined by calculating the gain from the sale.

The gain is the difference between the proceeds received and the policy’s “cost basis.” The cost basis refers to total premiums paid into the policy, less any amounts previously received tax-free (e.g., dividends or withdrawals). For example, if a policyholder paid $50,000 in premiums and receives $150,000 from a settlement, the $100,000 difference may be considered a taxable gain.

The tax treatment of this gain can vary. The portion of proceeds up to the cost basis is received tax-free. Any amount exceeding the cost basis but not the policy’s cash surrender value might be taxed as ordinary income. Proceeds received above the cash surrender value could be taxed as capital gains. For viatical settlements, specific tax exemptions may apply under federal law if the insured is terminally or chronically ill, though conditions must be met.

Settlement providers are required to issue Form 1099-L or Form 1099-LS to report gross proceeds from the sale to the policyholder and the Internal Revenue Service (IRS). Given the complexity of these tax rules and their impact on individual financial situations, consulting a qualified tax advisor is recommended. This guidance ensures proper reporting and understanding of tax liabilities associated with a policy sale.