Can You Sell Your Life Insurance Policy if You Are Under 65?

It is possible to sell a life insurance policy to a third party for a lump sum payment, even if the policyholder is under 65. While often associated with older individuals, specific circumstances allow for policy sales at younger ages. This option provides immediate funds, offering an alternative to letting a policy lapse or surrendering it for its cash value.

Understanding Life and Viatical Settlements

Selling a life insurance policy typically involves one of two primary types of transactions: a life settlement or a viatical settlement. A life settlement occurs when a policyholder sells their life insurance policy to a third-party investor for a cash payment. This payment is typically more than the policy’s cash surrender value but less than its full death benefit. The buyer then assumes responsibility for future premium payments and receives the death benefit upon the insured’s passing.

Life settlements are generally for individuals with a life expectancy of more than two years, often ranging from two to fifteen years. While commonly associated with individuals over 65, younger policyholders may qualify if they experience a significant health decline that impacts their life expectancy. This option can be suitable for those who no longer need the policy, can no longer afford the premiums, or require immediate funds for various expenses.

A viatical settlement is a specific type of life settlement for policyholders facing a terminal or chronic illness. To qualify, the insured typically has a life expectancy of two years or less. The immediate cash can cover medical expenses, long-term care costs, or improve the policyholder’s quality of life during their illness.

Eligibility and Policy Requirements

Eligibility for a life or viatical settlement depends on the policyholder’s circumstances and policy characteristics. For those under 65, qualification often hinges on health status. A terminal or chronic illness, certified by a physician, is typically required for a viatical settlement, regardless of age. For a standard life settlement, a significant health decline shortening life expectancy may also qualify a younger individual.

The life insurance policy itself must meet certain criteria to be considered for a settlement. Most permanent life insurance policies, such as whole life, universal life, and variable universal life, are eligible because they accumulate cash value. Convertible term life policies may also qualify if they can be converted to permanent coverage.

A minimum face amount is generally required, with most buyers seeking policies with a death benefit of $100,000 to $250,000 or more. Policies usually need to have been in force for a seasoning period, typically two to five years. To assess eligibility, policyholders provide policy documents and medical records, allowing buyers to evaluate life expectancy and policy specifics.

The Policy Sale Process

The process of selling a life insurance policy begins with engaging a licensed life settlement broker or provider. A broker shops the policy to multiple providers for competitive offers, while a provider directly purchases it. Selecting a licensed entity is important, as state regulations govern these transactions.

The next step involves gathering and submitting necessary documentation. This typically includes original policy documents, recent medical records, and premium statements. Authorization forms must also be signed, allowing the broker or provider to access and review confidential medical and financial information for assessment.

After reviewing submitted information, potential buyers generate offers based on their evaluation of the policy and the insured’s life expectancy. The broker, if utilized, presents these offers for consideration. If an offer is accepted, the closing process involves signing transfer documents that change the policy’s ownership and beneficiary designation to the buyer. The lump sum payment is then disbursed into an escrow account, ensuring all contractual obligations are met before funds are released to the seller.

Valuation Factors and Tax Considerations

Several factors influence a life insurance policy’s valuation in a settlement, directly impacting the offer amount. The policyholder’s life expectancy is a primary determinant; a shorter life expectancy generally results in a higher offer because the buyer anticipates receiving the death benefit sooner. The policy type also plays a significant role, with permanent policies like whole life or universal life often being more attractive due to their guaranteed nature and cash value accumulation.

The policy’s face value, or death benefit, is another factor, as a higher face value typically leads to a larger settlement amount. Lower ongoing premium costs make a policy more appealing to a buyer, as it reduces their future financial outlay. The financial strength rating of the issuing insurance company is also considered, with financially stable insurers generally preferred by buyers.

Regarding tax implications, proceeds from a life settlement are generally subject to a three-tier tax treatment. The portion of the proceeds up to the policy’s cost basis, which is typically the total amount of premiums paid, is generally received tax-free. Any amount received exceeding the cost basis but not exceeding the policy’s cash surrender value may be taxed as ordinary income. Proceeds received above the cash surrender value are typically taxed as capital gains.

For viatical settlements for terminally or chronically ill individuals, proceeds may be entirely tax-free under federal law, provided certain conditions are met, such as a life expectancy of 24 months or less. Given tax law complexities, consulting a qualified tax professional is advisable to understand the specific tax consequences.