Can You Sell a Term Life Insurance Policy?

Term life insurance provides financial protection for a specific period, offering a death benefit to beneficiaries if the insured passes away within the policy’s term. Unlike permanent life insurance, term policies generally do not accumulate cash value, meaning they typically do not have a savings component that grows over time. Policyholders might find themselves in situations where their financial needs or life circumstances change, leading them to reconsider their existing coverage before the term expires. This often prompts questions about whether there are options to discontinue the policy or even derive value from it, rather than simply letting it lapse.

Understanding Life Settlements

A life settlement involves the sale of an existing life insurance policy to a third-party buyer for a cash sum. This amount is typically greater than any cash surrender value the policy might have but less than its full death benefit. While more commonly associated with permanent life insurance, certain term policies, particularly those that are convertible to permanent coverage or have a substantial remaining term, may also be eligible for a life settlement. The buyer assumes responsibility for all future premium payments and receives the death benefit when the insured passes away.

Eligibility for a life settlement often depends on several factors, including the policyholder’s age and health status. Generally, policyholders are 65 years of age or older, and they may have experienced a decline in health, though not necessarily a terminal illness. The policy itself must also meet certain criteria, such as a sufficient face value, typically $100,000 or more, and manageable premium costs relative to the death benefit. For term policies, the ability to convert to a permanent policy or a long remaining term is often a prerequisite for consideration.

The process of pursuing a life settlement typically begins with contacting a licensed life settlement broker or provider. The policyholder then submits an application, along with necessary documentation such as medical records and detailed information about the insurance policy. Underwriters evaluate the insured’s life expectancy, which is a primary determinant of the policy’s value to potential buyers. Multiple buyers may review the policy and submit offers, and the policyholder can choose to accept the most favorable offer.

Once an offer is accepted, the policy’s ownership is formally transferred to the buyer, and the policyholder receives the agreed-upon cash payment. Factors that significantly influence the cash offer include the insured’s current life expectancy, the policy’s death benefit amount, and the ongoing premium costs. A shorter life expectancy generally results in a higher offer, as the buyer anticipates receiving the death benefit sooner. The type of policy also plays a role, with permanent policies often being more attractive due to their guaranteed death benefit and potential cash value.

The proceeds received from a life settlement can have tax implications that policyholders should consider. While the amount received up to the policyholder’s cost basis—which is generally the total premiums paid into the policy—is typically tax-free, any amount exceeding this basis may be subject to taxation. The portion of the proceeds that exceeds the cost basis but is less than the policy’s cash surrender value (if applicable) is often taxed as ordinary income. Any amount received above the cash surrender value is generally taxed as a capital gain.

Understanding Viatical Settlements

A viatical settlement offers a specific option for individuals facing a terminal illness who wish to access the death benefit of their life insurance policy while they are still living. This arrangement involves selling a life insurance policy to a third party for a cash sum, which is typically a percentage of the policy’s face value. The defining characteristic of a viatical settlement is the insured’s health condition, making it distinct from a standard life settlement.

Eligibility for a viatical settlement is strictly tied to the policyholder’s health, requiring a diagnosis of a terminal illness. A licensed physician must certify that the insured has a limited life expectancy, typically 24 months or less. This health criterion is the primary differentiator from a life settlement, where the insured may be elderly or in declining health but not necessarily terminally ill. The purpose of a viatical settlement is to provide financial relief for medical expenses or other needs during a critical time.

The process for a viatical settlement generally mirrors that of a life settlement, though it is often expedited due to the urgency of the policyholder’s health condition. The policyholder contacts a viatical settlement provider, submits medical records and policy details, and the provider evaluates the policy’s value based on the insured’s life expectancy. An offer is then made, and if accepted, ownership of the policy is transferred to the provider, who then assumes responsibility for future premiums and receives the death benefit upon the insured’s passing.

A significant advantage of a viatical settlement lies in its favorable tax treatment under federal law. Proceeds from a viatical settlement are generally excluded from the policyholder’s gross income if the insured is certified as terminally ill. For tax purposes, “terminally ill” typically means having an illness or physical condition that can reasonably be expected to result in death within 24 months or less from the date of the certification. This tax exemption provides a crucial financial benefit to individuals facing severe health challenges.

Other Courses of Action for Term Life Insurance

For policyholders who no longer need or want their term life insurance but do not qualify for a settlement, or prefer alternative options, several other courses of action are available. One straightforward approach is to simply stop paying the premiums. When premium payments cease, the policy will eventually lapse, meaning the coverage ends, and no death benefit will be paid out. This option provides no financial return to the policyholder and results in the forfeiture of all premiums previously paid.

Many term life insurance policies include a conversion rider, which allows the policyholder to convert their term coverage into a permanent life insurance policy, such as whole life or universal life, without requiring a new medical exam. This conversion typically must occur within a specified timeframe, often before a certain age or within a certain number of years from policy issuance. Converting to a permanent policy can provide lifelong coverage and may begin to accumulate cash value, which could potentially be accessed later or form the basis for a future life settlement if circumstances change.

Another option for policyholders is to donate their term life insurance policy to a charitable organization. This typically involves assigning ownership of the policy to the charity, which then becomes the beneficiary. The charity would assume responsibility for paying future premiums, or the donor could continue to pay the premiums and potentially receive a charitable tax deduction for those payments. Donating a policy can be a way to support a cause while potentially realizing tax benefits, depending on the policy’s characteristics and the donation structure.