Can You Sell a Term Life Insurance Policy?

A term life insurance policy can be sold, a process distinct from canceling or surrendering it. While term policies are temporary and typically do not build cash value, mechanisms exist for policyholders to monetize them before the term expires. This option provides financial liquidity, especially for those who no longer need coverage or cannot afford premiums. Eligibility often depends on specific policy features and the insured’s health.

Understanding Life Settlements and Viatical Settlements

Selling a life insurance policy typically occurs through a life settlement or a viatical settlement. A life settlement involves selling an existing policy to a third party for a lump sum payment. This payment is usually more than the policy’s cash surrender value but less than its full death benefit. The buyer assumes responsibility for all future premium payments and receives the death benefit when the insured passes away. This arrangement provides immediate funds to the original policyholder while relieving them of ongoing premium obligations.

A viatical settlement is a specific type of life settlement for policyholders facing a life-threatening or chronic illness. To qualify, the insured typically has a life expectancy of 24 months or less, or meets criteria for chronic illness, such as being unable to perform daily living activities. The proceeds offer immediate cash, which can be used for medical expenses, long-term care costs, or other urgent financial needs. The primary distinction from a life settlement is the insured’s health status, as viatical settlements address severe health conditions.

Eligibility and Policy Considerations

Several factors determine a term life insurance policy’s eligibility for sale. While permanent policies with cash value are more commonly sold, term policies can be eligible if convertible to a permanent form of coverage. A conversion rider, allowing conversion to a whole or universal life policy without a new medical exam, increases marketability. This option often has time limits, such as before the term expires or by a certain age.

The insured’s age and health status are significant considerations for potential buyers. For a life settlement, policyholders are typically aged 65 or older, and a decline in health can increase the policy’s appeal. For viatical settlements, a terminal or chronic illness with a short life expectancy is the main criterion. The policy’s face value is another factor, with most buyers considering policies with a minimum death benefit, often starting from $100,000.

Current and future premium costs influence a policy’s salability, as the buyer assumes these payments. Policies with manageable future premiums are more attractive. Many states require a policy to have been owned for a specific period, typically between two and five years, before it can be sold. This ownership period helps ensure the legitimacy of the transaction.

The Process of Selling Your Policy

Initiating the sale of a term life policy typically begins by contacting a life settlement broker or a direct life settlement provider. A broker acts as your representative, shopping your policy to various providers for competitive offers. Direct providers purchase policies without a middleman, which may limit the number of offers received.

The buyer or broker will request specific information and documentation to evaluate the policy. This includes detailed policy information, such as the face value and premium schedule, along with comprehensive medical records of the insured. Buyers use this information to assess the insured’s life expectancy, a primary determinant of the policy’s value in the secondary market.

Following evaluation, potential buyers generate offers for the policy. It is advisable to obtain multiple offers for the best value. Upon accepting an offer, the final steps involve signing legal agreements to transfer policy ownership to the buyer and formalizing the sale terms. After the sale closes, the agreed-upon cash payment is disbursed to the policyholder. The new owner takes over all premium payments and becomes the beneficiary, eventually receiving the death benefit when the insured dies.

Tax Implications of a Policy Sale

Proceeds from selling a life insurance policy through a life settlement have tax implications. The amount received is subject to income tax to the extent it exceeds the policyholder’s cost basis. The cost basis is the cumulative total of premiums paid into the policy. Any portion of the settlement proceeds equal to or less than the cost basis is typically not taxable.

If the proceeds exceed the cost basis, the excess amount is taxable. This taxable gain is often categorized into two tiers: the portion exceeding the cost basis but not exceeding the policy’s cash surrender value is taxed as ordinary income. Any remaining proceeds above the cash surrender value are taxed as long-term capital gains. This tax treatment is consistent with IRS guidance.

For viatical settlements, the tax treatment is generally more favorable. Proceeds are usually not taxable if the policyholder is certified by a physician as terminally ill, typically with a life expectancy of 24 months or less. For chronically ill individuals, proceeds may also be tax-free if used for qualified medical or long-term care expenses. Due to the complexities of these tax rules, consulting with a qualified tax professional is advisable before proceeding with any policy sale.