How and Where to Sell Your Life Insurance

Life insurance policies, while designed to provide financial security for beneficiaries after an individual’s passing, can also serve as a valuable asset during one’s lifetime. Unexpected financial needs or changes in life circumstances may lead policyholders to consider converting their existing policy into a lump sum of cash. This process, often referred to as selling life insurance, involves transferring policy ownership in exchange for immediate liquidity.

Policy Surrender

Policyholders can choose to surrender their life insurance policy directly to the issuing insurance company. This action terminates the policy, and in return, the insurer pays the policyholder its cash surrender value. Only permanent life insurance policies, such as whole life or universal life, accumulate a cash value that can be surrendered, unlike term life policies which typically do not.

The cash surrender value is determined by the policy’s accumulated cash value, less any applicable fees, outstanding loans, or prior withdrawals. Surrender charges, which can be substantial in the early years of a policy, are deducted from the cash value and may remain in effect for 10 to 15 years. While surrendering a policy offers a straightforward way to access funds, it often yields a lower return compared to other selling methods, particularly for policies with significant cash value or for policyholders in good health.

Life Settlements

A life settlement involves selling an existing life insurance policy to a third-party investor for a cash sum. This payout is greater than the policy’s cash surrender value but less than its net death benefit. The investor then assumes responsibility for all future premium payments and receives the death benefit when the insured passes away.

Policyholders who qualify for a life settlement are 65 years or older and are not terminally ill. Policies with a face value of $100,000 or more are considered, and the policy must have been in force for at least two years. The process begins with the policyholder working with a life settlement broker or provider. A life settlement broker represents the seller and helps secure competitive offers from multiple buyers, while a life settlement provider directly purchases the policy.

Factors influencing the settlement amount include the policyholder’s age and health, as a shorter life expectancy often leads to a higher payout because the buyer will pay premiums for a shorter duration. The policy’s death benefit amount, its type (permanent policies like whole life or universal life are preferred), and the cost of future premiums also play a role. The process involves an application, documentation, medical underwriting to assess life expectancy, and a bidding phase where investors submit offers. If an offer is accepted, ownership is transferred, and the policyholder receives the lump-sum payment.

Viatical Settlements

Viatical settlements are a specific type of life settlement designed for policyholders facing a terminal or chronic illness. This allows individuals to sell their life insurance policy to a third-party investor for a cash payment, providing immediate funds that can be used for medical expenses or other needs. The distinction from a standard life settlement is the policyholder’s health status.

To qualify for a viatical settlement, the policyholder has a life expectancy of 24 months or less due to a terminal illness, or a chronic illness that prevents them from performing daily living activities. Medical verification is an important step in the process, similar to life settlements, where medical records are reviewed to confirm eligibility. The funds received from a viatical settlement can be a resource for individuals managing significant healthcare costs or seeking to improve their quality of life during a challenging period.

Regulatory protections apply specifically to viatical settlements, reflecting the vulnerable circumstances of the sellers. Policyholders considering this option should also understand potential implications for government benefits, such as Medicaid eligibility, as receiving a large cash sum could affect their qualification for these programs.

Tax Considerations

The proceeds received from selling a life insurance policy can have tax implications, which vary depending on the method of sale and the specific policy. When surrendering a policy, any amount received that exceeds the total premiums paid into the policy (the cost basis) is treated as ordinary income and is taxable. For example, if $20,000 in premiums were paid and the surrender value is $30,000, the $10,000 gain is taxable as ordinary income.

For life settlements, the tax treatment is tiered. Proceeds received up to the total premiums paid are tax-free. Any amount received above the premiums paid, but not exceeding the policy’s cash surrender value, is taxed as ordinary income. Any remaining proceeds that exceed both the premiums paid and the cash surrender value are subject to capital gains tax.

Proceeds from a viatical settlement for a terminally or chronically ill individual are tax-exempt under Internal Revenue Code Section 101. This provision treats the amount paid for the sale or assignment of the death benefit to a qualified viatical settlement provider as an amount paid under the life insurance contract by reason of the insured’s death. Consulting with a qualified tax advisor or financial planner is recommended for personalized advice regarding any potential tax liabilities.