Can You Sell a Universal Life Insurance Policy?

Universal life insurance policies, a form of permanent life insurance, offer lifetime coverage and a cash value component. This type of policy provides flexibility in premium payments and a death benefit to beneficiaries. Policyholders can sell these policies, though various considerations are involved.

Understanding Your Policy’s Value

The market value of a universal life insurance policy is influenced by several factors. A significant element is the policy’s cash value, which accumulates over time from premiums paid. This cash value grows on a tax-deferred basis and can be accessed during the policyholder’s lifetime.

The death benefit amount also plays a role, representing the payout the new owner would receive. The insured’s age and health status are particularly impactful; older or less healthy individuals often make a policy more attractive to buyers. Policy type, such as indexed universal life or variable universal life, can affect value based on how cash value is linked to interest rates or market performance. Consistent premium payments contribute to a higher cash value and overall policy stability. Internal costs and fees associated with the policy also influence its net value.

Options for Divesting Your Policy

Universal life insurance policies can be divested in several ways, each with distinct outcomes for the policyholder. One option is surrendering the policy to the issuing insurance company. The policyholder receives the cash surrender value, which is the accumulated cash value minus any surrender charges or outstanding loans. This amount is typically less than the policy’s full cash value, especially in the early years.

A life settlement involves selling the policy to a third-party investor. The policyholder receives a lump-sum cash payment that is generally more than the cash surrender value but less than the full death benefit. The buyer assumes responsibility for all future premium payments and becomes the new beneficiary, collecting the death benefit upon the insured’s passing. This option is typically considered by policyholders who no longer need or can afford their coverage.

A viatical settlement is a specific type of life settlement designed for individuals who are terminally or chronically ill. These settlements allow the insured to sell their policy at a discount for immediate cash. The key differentiator is the insured’s health status, often requiring a life expectancy of two years or less for a terminal illness classification. Viatical settlements aim to provide funds for medical care and other expenses during a challenging time.

The Life Settlement Process

The life settlement process involves several steps after a policyholder decides this option aligns with their financial needs. The initial step is finding a licensed life settlement broker or provider. A broker represents the seller and compares offers, while a provider directly purchases the policy. Policyholders engage with a broker or provider to determine if their policy qualifies, often requiring a death benefit of at least $100,000 and the insured to be over age 65.

Once a match is identified, the policyholder submits detailed policy information and medical records. Documentation includes the policy’s in-force illustration (outlining premium costs and cash values), medical history, and a medical questionnaire. Life expectancy underwriters use these records to estimate the insured’s lifespan, a crucial factor for buyer valuation. The policyholder must also provide authorization, such as a HIPAA form, for access to medical and insurance information.

After review and underwriting, the policyholder receives offers from buyers. These offers represent a lump-sum payment. If an offer is accepted, the transaction proceeds to closing, involving a purchase agreement and other necessary documentation. This includes forms to transfer policy ownership and change beneficiary designation to the buyer. Once documents are executed and ownership transferred, funds are typically placed in escrow and disbursed to the seller. The entire process, from inquiry to receiving funds, can take up to a few months.

Tax Consequences of Policy Divestment

Divesting a universal life insurance policy can trigger various tax consequences, depending on the method chosen and amounts involved. When a policy is surrendered, any amount received exceeding the policyholder’s “cost basis” is generally taxed as ordinary income. The cost basis typically represents total premiums paid into the policy, reduced by any prior tax-free distributions. For example, if $20,000 in premiums were paid and the surrender value is $30,000, the $10,000 gain is taxable as ordinary income.

For a life settlement, tax treatment can be more complex. Proceeds are generally taxed in two parts. The portion of the sale amount that is less than or equal to the cost basis is typically tax-free. Any amount received above the cost basis up to the cash surrender value is usually taxed as ordinary income. Any amount received in excess of the cash surrender value is generally subject to capital gains tax.

Viatical settlements often receive more favorable federal tax treatment. Proceeds from a viatical settlement are generally tax-exempt if the insured is certified as terminally ill by a physician (typically with a life expectancy of 24 months or less). For chronically ill individuals, proceeds may also be tax-free if used to cover qualified long-term care expenses. This tax-exempt status is a significant advantage for those facing severe health challenges. Given these complexities, consulting a qualified tax professional is advisable to understand individual implications.