Can You Sell Your Term Life Insurance?

Life insurance provides a financial safeguard, offering a death benefit to beneficiaries upon the insured’s passing. While permanent life insurance policies can accumulate cash value, term life insurance is temporary and typically holds no such liquidity. However, under specific circumstances, policyholders can gain liquidity from a term life policy. These processes involve complexities and specific requirements, which diverge significantly from simply “cashing out” a policy.

Understanding Term Life Insurance Features

Term life insurance provides coverage for a specific period, or “term,” such as 10, 20, or 30 years. The policy pays a predetermined death benefit to beneficiaries if the insured dies within this term. Premiums are typically fixed for the duration, offering predictable costs.

A fundamental characteristic distinguishing term life from permanent life insurance, like whole life or universal life, is the absence of a cash value component. This means a term policy does not accumulate a savings or investment element accessible through withdrawals or loans. If the insured outlives the policy term, coverage simply expires, and no death benefit is paid or premiums refunded.

Options for Selling or Liquidating a Term Policy

Despite the absence of cash value, certain mechanisms allow policyholders to obtain liquidity from a term life insurance policy. These options involve selling the policy to a third party or accessing a portion of the death benefit under specific conditions. A straightforward surrender, common with permanent policies, does not yield proceeds for term life insurance.

Life Settlements

A life settlement involves selling an existing life insurance policy to a third party for a cash sum. This sum is greater than any cash surrender value but less than the full death benefit. The buyer, usually a life settlement company, becomes the new policy owner, assumes responsibility for future premiums, and receives the death benefit when the insured dies. Eligibility depends on factors like the policy’s face value, remaining term, and the policyholder’s age and health. The process involves an application, medical review, an offer from the buyer, and the eventual transfer of policy ownership.

Accelerated Death Benefits

Accelerated death benefits, also known as living benefits riders, offer another way to access funds from a life insurance policy while the insured is still alive. These riders allow policyholders to receive a portion of their death benefit early under specific qualifying conditions. Common conditions include a diagnosis of terminal, chronic, or critical illness. This is an advance from the insurance company, which subsequently reduces the death benefit paid to beneficiaries upon the insured’s death.

Conversion Option

Some term policies include a conversion option, allowing the policyholder to convert the term policy into a permanent life insurance policy without a new medical exam. This conversion is permitted within a specified timeframe and age limit. Once converted, the policy becomes a permanent policy with a cash value component. This makes it potentially eligible for a life settlement if the policyholder then chooses to sell the newly converted permanent policy. This two-step process can provide a pathway to liquidity for term policyholders who might not otherwise qualify for a direct life settlement.

Factors Influencing Policy Value

The amount a term life policy might yield in a life settlement is determined by several factors, primarily revolving around the insured’s life expectancy and the policy’s financial characteristics. These elements help potential buyers assess the investment’s profitability and ultimate value.

Insured’s Health

The insured’s health is a significant determinant. A declining health status or a shorter life expectancy generally increases the policy’s value to a buyer. Buyers aim to receive the death benefit sooner, making policies on individuals with reduced life expectancies more appealing. Actuarial tables estimate life expectancy based on current health conditions.

Insured’s Age

The insured’s age also plays a role, with older policyholders often commanding higher offers, especially when combined with health considerations. Individuals aged 65 or older with policies of $100,000 or more are typically considered for life settlements.

Policy Face Value

A larger death benefit, or face amount, on the policy usually translates to a higher offer. This represents a greater potential payout for the buyer.

Remaining Term and Premiums

The remaining length of the term for a term policy is another factor. A longer remaining term can be favorable, particularly if the policy is convertible. This provides the buyer with more time to manage the policy or convert it. Ongoing premium costs also influence value, as lower future premium payments for the buyer increase the policy’s attractiveness and profitability. Policies with specific riders or features, such as conversion options, can also affect their value and eligibility.

Tax Considerations for Policy Sales

Selling or liquidating a life insurance policy involves specific tax considerations that can impact the net proceeds received. Understanding these implications is important for financial planning and compliance. Tax treatment varies depending on the method of liquidation.

Life Settlement Proceeds

Proceeds from a life settlement are generally subject to taxation. The tax treatment is structured in layers. The portion of proceeds equal to total premiums paid into the policy (cost basis) is usually received tax-free. Any amount received above the cost basis, up to the policy’s cash surrender value, may be taxed as ordinary income. Any amount received in excess of the cash surrender value but below the death benefit is generally taxed as a capital gain. For pure term policies, the gain is often taxed as a capital gain.

Accelerated Death Benefits

Accelerated death benefits are generally treated differently for tax purposes. These payments are typically received tax-free if the insured is terminally or chronically ill, provided specific Internal Revenue Service (IRS) criteria are met. For terminal illness, a physician usually certifies the individual has 24 months or less to live. For chronic illness, there are specific requirements related to inability to perform activities of daily living. The IRS issues Form 1099-LTC to report these payments, though they are usually excludable from gross income under qualifying conditions.

Professional Consultation

The specific tax treatment depends heavily on individual circumstances, the type of policy, and current tax laws. Consulting with a qualified tax advisor or financial planner is strongly recommended before proceeding with any policy sale or accessing accelerated benefits. This guidance ensures accurate understanding of potential tax liabilities and proper reporting to tax authorities.