Can You Sell Your Life Insurance Policy?

Life insurance policies, while providing future financial protection, can also be a valuable asset during a policyholder’s lifetime. Under certain circumstances, these policies may be converted into immediate cash, offering a pathway to liquidity for various financial needs. Policyholders who find their coverage no longer aligns with their objectives, or who face evolving financial situations, might explore options to access the accumulated value or discontinue premium payments. The decision to access a policy’s value or discontinue its coverage involves understanding various available avenues.

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 payment is typically greater than the policy’s cash surrender value but less than its net death benefit. The buyer, usually an institutional investor, assumes ownership of the policy, takes over all future premium payments, and ultimately receives the death benefit upon the insured’s passing.

Individuals often consider a life settlement when their financial or health needs change, or when the original purpose of the coverage no longer exists. For example, seniors might find premiums increasingly unaffordable or discover that beneficiaries no longer depend on the death benefit. Proceeds from a life settlement can address various financial demands, such as covering medical expenses, funding retirement, or reducing debt.

Life settlement proceeds are generally subject to federal income tax, though the taxation structure is tiered. The amount received up to the policyholder’s cost basis, which is the total premiums paid, is typically tax-free. Any portion of the proceeds exceeding the cost basis but not exceeding the policy’s cash surrender value is generally taxed as ordinary income. Amounts received above the cash surrender value are usually taxed as capital gains.

Assessing Policy Eligibility and Value

The insured’s age and health status are primary considerations for a life settlement. Generally, individuals aged 65 or older are more likely to qualify, though younger policyholders with significant health impairments or a shortened life expectancy may also be eligible. The life expectancy of the insured is a determinant, as buyers seek policies where the death benefit will be received within a predictable timeframe.

The type of life insurance policy plays a role in eligibility and valuation. Permanent policies, such as universal life or whole life insurance, which accumulate cash value, are typically eligible for life settlements. Convertible term policies with substantial death benefits can also qualify if they are capable of being converted into permanent coverage. Policy death benefit amounts are generally considered for policies with a face value of $100,000 or more, with higher amounts often being more attractive to investors.

Ongoing premium costs influence a policy’s value in a life settlement. Policies with lower future premiums are generally more appealing to buyers, as this reduces their ongoing investment. The policy’s in-force period is another factor, with most providers requiring a policy to have been active for at least two years, and some states mandating a longer period, up to five years. To assess a policy’s suitability and potential market value, detailed information about the policy’s specifics and the insured’s medical history, including physician statements, will be required by potential providers.

Steps to Sell a Life Insurance Policy

The initial step involves engaging a reputable life settlement broker or directly contacting a life settlement provider. Brokers act as intermediaries representing the policyholder’s interests, navigating the market to secure competitive offers from various providers. Licensed brokers are often regulated by state insurance departments, providing an additional layer of oversight.

Once a broker or provider is chosen, the policyholder submits a formal information package. This package includes detailed policy documents, medical records, and authorization for release of medical information. This submission allows buyers to assess the insured’s health and life expectancy, which impacts their offer. After reviewing the submitted information, life settlement providers will present offers for the policy.

Policyholders then receive and evaluate these offers, which can vary significantly based on the policy’s characteristics, the insured’s health, and market conditions. Payouts for life settlements typically range between 10% and 25% of the policy’s face value, though some can be higher. Broker fees often range from 15% to 30% of the gross settlement amount, and other administrative or legal fees may apply.

Upon accepting an offer, the transaction proceeds to due diligence and closing. This stage involves reviewing and signing legal documents, including the transfer of policy ownership and a change of beneficiary designation. Funds are generally held in an escrow account, ensuring a secure transfer. After closing, the new owner assumes responsibility for all future premium payments and receives the death benefit when the insured passes away. The original policyholder no longer has any rights to the policy’s death benefit.

Exploring Other Policy Options

Policyholders seeking to access their policy’s value or discontinue coverage have several alternatives beyond a life settlement. One common option is a cash surrender, where the policyholder directly terminates the policy with the issuing insurance company. The insurer pays the policyholder the accumulated cash surrender value, which is the cash value less any surrender charges or outstanding loans. Any amount received that exceeds the total premiums paid into the policy is generally considered taxable income.

Accelerated death benefits, also known as living benefits, offer another avenue to access policy funds. These provisions, often available as riders on permanent life insurance policies, allow policyholders to receive a portion of their death benefit while still alive under specific health circumstances. Common qualifying conditions include a terminal illness, often with a life expectancy of 24 months or less, or a chronic illness requiring long-term care. For terminally or chronically ill individuals, these benefits are generally not taxable if certain IRS criteria are met and funds are used for qualified long-term care expenses.

Policy loans allow policyholders to borrow money directly from their permanent life insurance policy, using the accumulated cash value as collateral. These loans accrue interest, and if not repaid, the outstanding loan balance and accrued interest are deducted from the death benefit paid to beneficiaries. Policy loans are generally not considered taxable income, as they are treated as a debt against the policy’s cash value. Another option is the reduced paid-up option, where the policy’s cash value is used to purchase a smaller death benefit that requires no further premium payments. The original policy’s cash value converts into a single premium for a new, smaller policy.

Policyholders with charitable intentions may also consider donating their life insurance policy to a qualified charity. This involves irrevocably transferring ownership of the policy to the charitable organization, which then becomes the owner and beneficiary. The donor may be eligible for an income tax deduction, generally limited to the lesser of the policy’s cash value or the adjusted cost basis (premiums paid). Future premium payments made directly to the charity may also be deductible. This option allows individuals to make a philanthropic contribution while potentially realizing tax benefits.