Can You Sell a Term Life Policy for Cash?

While term life insurance policies typically do not accrue cash value like permanent policies, it is possible to sell them for cash. This is primarily done through a life settlement, especially if the policy is convertible to permanent coverage or if the policyholder has certain health conditions. This option allows policyholders to monetize a policy that may no longer be needed or affordable.

Life Settlements Explained

A life settlement involves selling an existing life insurance policy to a third party for a lump sum of cash. This cash payment is greater than the policy’s cash surrender value, if any, but less than the full death benefit. The buyer, typically an institutional investor, then assumes ownership of the policy, including responsibility for all future premium payments. Upon the death of the insured, the new owner receives the death benefit.

A life settlement allows policyholders to convert an unwanted policy into immediate cash. Unlike surrendering a policy to the insurer for its cash surrender value, a life settlement involves a third-party market. The payout can be significantly higher, often four to seven times greater on average, as the settlement value is determined by market demand and the policy’s future death benefit, not just accumulated cash value.

The proceeds from a life settlement can be used for various purposes, such as covering medical expenses, funding retirement, or managing other financial needs. Any amount received from a life settlement that exceeds the total premiums paid into the policy may be subject to income tax. For example, if a policy sells for $100,000 and $60,000 in premiums were paid, the $40,000 difference could be taxed as ordinary income.

Eligibility and Valuation for Life Settlements

Life settlement eligibility depends on the policyholder’s age, health, and policy characteristics. Buyers typically prefer those aged 65 or older, though younger individuals with significant health impairments or life-threatening conditions may qualify. A shorter life expectancy often results in a higher offer, as buyers receive the death benefit sooner.

The policy’s face value is also important; policies usually need a death benefit of at least $100,000. Larger face values attract more interest and higher payouts. While permanent policies are commonly eligible, convertible term policies can also qualify, especially if transitioned to permanent coverage. Non-convertible term policies may be eligible in limited cases, often requiring a serious or terminal health condition.

The valuation process involves a thorough assessment by providers, considering various elements. A key factor is the insured’s life expectancy, estimated by third-party report providers using medical records, lifestyle factors, and standard mortality charts. The remaining premium payments required to keep the policy in force also influence its value; lower future premiums can increase market value. Additionally, current interest rates and the issuing insurance company’s financial strength rating are considered.

The Life Settlement Transaction Process

The life settlement process begins with an inquiry to a licensed provider or broker, who assesses eligibility. If the policy qualifies, the next step is gathering documentation, including original policy documents, medical history, and financial statements.

After compiling information, the provider or broker solicits offers from multiple buyers. A life settlement broker represents the policy owner, seeking the highest offer from a network of licensed buyers. The broker has a fiduciary duty to the policyholder, ensuring transparency. The policyholder then chooses the most favorable offer.

Once an offer is accepted, the buyer conducts due diligence, verifying information like policy details and medical records. After successful due diligence, the policyholder signs legal documents to transfer policy ownership and beneficiary rights. Funds are placed in an escrow account for a secure transfer, and the lump sum is disbursed upon completion. The entire process typically takes several weeks to a few months.

Other Ways to Access Policy Value

Beyond life settlements, policyholders can access value from a life insurance policy through other avenues. A common option for term policyholders is converting their term policy into a permanent one. Many term policies offer a conversion privilege, allowing this change without a new medical exam, usually within a specified timeframe or age. This creates a policy with a cash value component accessible via loans or withdrawals.

Another alternative is utilizing accelerated death benefits, if available as a rider on the policy. This provision allows a policyholder to access a portion of their policy’s death benefit while still living, usually if diagnosed with a terminal or chronic illness. The amount received reduces the final death benefit paid to beneficiaries, but it can provide funds for medical expenses or long-term care. This option is distinct from a life settlement as it involves the original insurer and typically has specific health-related triggers.

Term policies generally cannot be surrendered for cash value, as they do not build it. If coverage is no longer needed and there’s no cash value, letting the policy lapse by ceasing premium payments is an option, though it yields no financial return. For permanent policies with cash value, surrendering means canceling the policy for its accumulated cash surrender value, which is typically less than a life settlement payout.