Can You Sell a Whole Life Insurance Policy?

It is indeed possible to sell a whole life insurance policy, providing policyholders with options to liquidate their coverage if their financial needs or circumstances change. These policies, which accumulate cash value over time, can be converted into immediate funds through different avenues.

Understanding Policy Sale Methods

Policyholders seeking to liquidate a whole life insurance policy have distinct methods available, each with unique characteristics and financial implications. The most straightforward option involves surrendering the policy directly to the issuing insurance company. When a policy is surrendered, the policyholder receives its “cash surrender value,” which represents the accumulated cash value less any surrender charges, outstanding loans, or fees. This transaction directly cancels the policy, ending the insurance coverage.

An alternative approach is a life settlement, which involves selling the life insurance policy to a third-party investor. In this transaction, the policyholder receives a lump sum cash payment that is typically greater than the policy’s cash surrender value but less than the full death benefit. The buyer then assumes responsibility for all future premium payments and becomes the new beneficiary, receiving the death benefit when the insured passes away. Life settlement providers or brokers often facilitate these transactions, connecting policyholders with interested investors.

A viatical settlement is a specific type of life settlement designed for policyholders who are terminally or chronically ill. The defining characteristic of a viatical settlement is the health status of the insured, as it typically requires a life expectancy of 24 months or less for terminal illness, or an inability to perform certain daily living activities for chronic illness. Similar to a life settlement, the policy is sold to a third party for an immediate cash payment, which is generally more than the cash surrender value but less than the death benefit. However, due to the shortened life expectancy, viatical settlements often result in a higher percentage of the death benefit being paid to the policyholder compared to standard life settlements.

Factors Determining Policy Value

Several elements influence the potential value a whole life insurance policy can command when it is sold or surrendered. A primary factor is the policy’s cash value accumulation, which is the savings component that grows over the life of the policy. This cash value, along with any accumulated dividends, directly determines the cash surrender value received if the policy is given back to the insurer.

The death benefit amount, also known as the face value, significantly impacts the policy’s attractiveness to third-party buyers in life or viatical settlements. A larger death benefit generally leads to a higher potential offer because it represents the ultimate payout the buyer will receive. Policies with death benefits typically starting at $100,000 are often more appealing to the life settlement market.

The insured’s age and health are particularly important, especially for life and viatical settlements. For life settlements, older age often correlates with a shorter life expectancy, making the policy more appealing to buyers who anticipate receiving the death benefit sooner. In the case of viatical settlements, a diagnosis of a terminal or chronic illness, which significantly shortens life expectancy, can lead to substantially higher offers. Life settlement providers assess health conditions rigorously, as a shorter life expectancy means fewer premium payments for the buyer.

The history of premium payments and the policy’s duration also contribute to its value. Consistent premium payments allow the cash value to grow steadily over time, increasing the surrender value. A policy that has been in force for a longer period may have accumulated a more substantial cash value and could be more attractive to buyers. Additionally, specific policy riders or unique features attached to the policy might influence its overall valuation, as these can add to the policy’s attractiveness or affect its future costs.

Navigating the Sale Process and Tax Implications

The process for surrendering a whole life insurance policy is relatively straightforward. Policyholders typically initiate this by contacting their insurance company directly. They will then need to complete and submit a surrender form provided by the insurer. Once processed, the policyholder receives the cash surrender value, usually as a lump sum payment.

Selling a policy through a life or viatical settlement involves a more detailed multi-step process. The first step usually entails an initial inquiry and application to a life settlement provider or broker. Policyholders then submit required documentation, which often includes the original policy documents, medical records, and authorization for the release of health information. The buyer conducts an underwriting process to assess the insured’s life expectancy based on health and other factors.

After this assessment, the policyholder receives and reviews offers from various buyers, which may be facilitated by a broker who comparison shops for the best terms. If an offer is accepted, the policyholder signs necessary transfer documents, such as change of ownership and beneficiary forms, to legally transfer the policy to the buyer. Once the transfer of ownership is verified, the agreed-upon funds are disbursed to the policyholder.

The tax implications of selling a whole life insurance policy vary significantly by method. For a policy surrender, any amount received above the “cost basis”—the total premiums paid into the policy—is generally considered taxable as ordinary income. For example, if $20,000 was paid in premiums and the surrender value is $30,000, the $10,000 gain is taxable. The cash surrender value itself is typically tax-free up to the amount of premiums paid.

Life settlements have a more complex tax treatment, often involving a tiered approach. The portion of the proceeds up to the policy’s cost basis (total premiums paid) is typically tax-free. Any amount received above the cost basis but below the policy’s cash surrender value is generally taxed as ordinary income. Finally, any proceeds received that exceed the policy’s cash surrender value are typically taxed as capital gains.

Viatical settlements, uniquely, are generally tax-free for terminally or chronically ill individuals under specific Internal Revenue Service (IRS) guidelines. For a terminally ill individual, proceeds are entirely tax-free if a physician certifies a life expectancy of 24 months or less. For chronically ill individuals, the proceeds are tax-free if used to cover qualified unreimbursed long-term care expenses, and the individual is unable to perform at least two activities of daily living. It is always advisable to consult with a qualified tax professional or financial advisor to understand the specific tax consequences based on individual circumstances and current tax laws.