Can You Sell a Term Life Insurance Policy for Cash?

Term life insurance policies do not build cash value, meaning they cannot be directly sold for cash like permanent life insurance policies. However, under specific circumstances, and typically after a conversion process, it becomes possible to access value from or sell such a policy. This process involves transforming the temporary coverage into a permanent form.

Characteristics of Term Life Insurance

Term life insurance provides coverage for a specific period, known as the “term,” which can range from one to thirty years or more. This policy offers a death benefit to beneficiaries only if the insured person passes away within the defined term. Premiums are fixed for the duration of the chosen term, making it a budget-friendly option for many individuals.

Term life insurance is temporary and lacks a cash value component. Unlike permanent life insurance policies, such as whole life or universal life, term policies do not accumulate a savings or investment portion. If the policyholder outlives the term, coverage ends, and there is no cash payout or accumulated value to receive. This absence of cash value impacts the ability to sell the policy for cash.

Converting Your Term Policy

Converting a term life insurance policy into a permanent one is often a necessary step to unlock potential cash value or make the policy eligible for a life settlement. This process allows a temporary policy to transform into a permanent one that can accumulate cash. Many term policies include a conversion privilege, allowing policyholders to change their coverage without needing a new medical exam, which can be beneficial if health has declined.

Eligibility for conversion is usually outlined in the original policy contract, often specifying a conversion window or a maximum age by which conversion must occur. Policyholders should review their documents or contact their insurance company to understand these timelines and options. The converted policy can be a whole life or universal life policy, each offering different features regarding cash value growth and premium structures.

To initiate conversion, the policyholder contacts their insurance provider to discuss available permanent policy types and new premium calculations. The new premium will generally be higher than the original term premium, reflecting the lifetime coverage and cash value component. Once the new policy type is selected, paperwork is completed to finalize the conversion.

Selling a Converted Policy

Once a term life insurance policy has been converted into a permanent one, thereby acquiring a cash value component, it may become eligible for a life settlement. A life settlement involves selling an existing life insurance policy to a third party for a cash sum. This payment is greater than the policy’s cash surrender value but less than its full death benefit. The buyer assumes responsibility for future premium payments and receives the death benefit when the insured passes away.

Eligibility for a life settlement generally requires the insured to be at least 65 years old, or younger with a significant health impairment affecting life expectancy. Policies with a death benefit of at least $100,000 are typically considered. The life settlement process begins with contacting a life settlement broker or provider.

Steps include submitting detailed policy information and medical records for evaluation. Buyers assess the policy’s value based on factors like the insured’s age, health, and future premium costs. After offers are received and accepted, legal documents transfer ownership and beneficiary rights to the buyer. The cash payment is then placed in an escrow account and released to the seller upon completion of the transfer.

Proceeds up to the total premiums paid (cost basis) are not taxable. Amounts received above the cost basis up to the policy’s cash surrender value may be taxed as ordinary income, and any proceeds exceeding the cash surrender value might be taxed as capital gains.

Other Options for Your Term Policy

If converting and selling a policy is not a desired or viable option, several alternatives exist for a term life insurance policy. One choice is allowing the policy to lapse. If premium payments are discontinued, the policy will terminate, and no death benefit will be paid out.

Another option, if available as a rider, is to utilize accelerated death benefits, also known as living benefits. This feature allows policyholders to access a portion of their death benefit while still alive if diagnosed with a terminal or chronic illness. This is not a sale of the policy but an advance on the death benefit, often used to cover medical expenses or other costs during a serious illness.

Payments from accelerated death benefits are not subject to federal income tax under the Health Insurance Portability and Accountability Act for terminally ill individuals. For a policy converted to permanent life insurance that has accumulated cash value, surrendering the policy to the insurer is an option. Surrendering yields the policy’s cash surrender value, which is the accumulated cash value minus any applicable fees or outstanding loans. While less than a life settlement, any amount received in excess of the premiums paid is considered taxable income at ordinary rates.