Can You Sell Your Term Life Insurance Policy?

Term life insurance provides financial protection for a specific period, such as 10, 20, or 30 years. It offers a death benefit to beneficiaries if the insured passes away within that term. Unlike permanent life insurance, it does not build cash value. This characteristic often leads to the misconception that term life policies hold no value outside of the death benefit. However, a term life insurance policy can be sold under certain circumstances.

The Possibility of Selling Term Life Insurance

Selling a term life insurance policy is possible through a life settlement. This involves the policyholder selling their policy to a third-party investor for a lump-sum cash payment. The buyer assumes responsibility for all future premium payments and receives the death benefit when the insured passes away. The amount received is more than the policy’s cash surrender value, if any, but less than the full death benefit.

Life settlements offer policyholders an opportunity to unlock value from a policy they no longer need or can afford. The transaction provides immediate cash, allowing the seller to use the funds for various purposes, such as medical expenses, retirement, or debt repayment. The market for life settlements is regulated, connecting policyholders with investors who view the policy as a financial asset.

Eligibility for Life Settlements

To qualify for a life settlement, a term life insurance policy and its owner must meet specific criteria. Policyholders are generally 65 years or older, as increased age implies a shorter life expectancy, which enhances the policy’s value to an investor. Younger policyholders may also qualify if they have a serious health condition that reduces their life expectancy. Investors assess the insured’s health status to estimate life expectancy and determine the policy’s potential profitability.

The policy’s face value, or death benefit, is another factor, with most life settlement providers requiring a minimum of $100,000. Policies with higher face values are more appealing to buyers. The type of policy also plays a role; while permanent policies are more sought after, convertible term life policies are eligible for life settlements. Some non-convertible term policies may also be considered, particularly if the insured has a significantly reduced life expectancy. Policies need to have been in force for a certain period, at least two to five years, depending on state regulations.

The Life Settlement Process

The process of selling a term life insurance policy through a life settlement begins with an initial consultation with a life settlement broker or provider. This step allows the policyholder to determine if their policy and circumstances align with eligibility requirements. The policyholder submits an application and authorizes the release of necessary documentation. Documents include the original policy, premium payment history, and medical records.

Once gathered, the life settlement provider or broker initiates an underwriting and valuation phase. During this stage, potential buyers review the policy details and the insured’s health information to estimate life expectancy. This estimation directly impacts the policy’s market value and profitability for the buyer, who will assume future premium payments. Interested buyers then submit offers for the policy.

The policyholder receives these offers and can negotiate for a better price or accept one that meets their financial needs. If an offer is accepted, a formal life settlement agreement is signed by all parties. This agreement legally transfers ownership of the policy and changes the beneficiary designation to the new buyer. The transaction then moves to an escrow phase, where the buyer funds the agreed-upon settlement amount. Upon confirmation of the policy transfer, the proceeds are released to the original policyholder within a few business days.

Financial and Tax Considerations

A life settlement provides a cash payout that is higher than the policy’s cash surrender value, but less than the full death benefit. The exact amount received varies based on factors such as the insured’s age, health, the policy’s face value, and ongoing premium costs. Payouts can range from 10% to 25% of the policy’s face value, with an average around 20%. This compensation is a lump sum, available immediately to the policyholder.

The proceeds from a life settlement have specific tax implications. Under federal tax law, the proceeds are treated in a three-tiered manner, as outlined by IRS guidance.
First, the portion of the proceeds up to the amount of premiums paid into the policy (the cost basis) is received tax-free. Second, any amount received above the cost basis but up to the policy’s cash surrender value may be taxed as ordinary income. Third, any remaining proceeds exceeding both the cost basis and the cash surrender value are taxed as long-term capital gains. State income taxes may also apply, varying depending on the state’s laws regarding capital gains and ordinary income. Policyholders should consult with a qualified tax professional to understand the precise tax consequences.

Alternatives to Selling Your Policy

When a term life insurance policy is no longer needed, selling it through a life settlement is one option, but others exist. One alternative is to stop paying premiums, allowing the policy to lapse. This terminates coverage, and no further financial obligations are incurred, though no cash value is received.

For policies that have accrued some cash value, surrendering the policy to the issuing insurance company is an option. The insurer provides the policyholder with the accumulated cash surrender value, which is less than what might be obtained through a life settlement. Another alternative for convertible term policies is to exercise the conversion rider, transforming the temporary term coverage into a permanent life insurance policy. This change allows the policy to remain in force for the rest of the insured’s life without requiring a new medical exam. Policyholders can also donate their life insurance policy to a charitable organization. This can provide a charitable deduction for the donor, and the charity receives the death benefit upon the donor’s passing.