How Can I Sell My Life Insurance Policy?

Selling a life insurance policy can provide immediate financial liquidity, offering an alternative to letting a policy lapse or surrendering it for its cash value. This process involves converting a future death benefit into a present-day lump sum payment. Understanding the options and process is important for policyholders considering this decision. This article outlines ways to extract value from a policy and the sale process.

Ways to Get Value from Your Policy

Policyholders have several avenues to access the value of their life insurance, each with distinct characteristics and suitability for different situations. One option is a life settlement, which involves selling an existing life insurance policy to a third-party investor for a lump sum. The payment received from a life settlement is typically greater than the policy’s cash surrender value but less than the full death benefit. This option is generally available to policyholders, often those aged 65 or older, who may be experiencing declining health.

A specific type of life settlement is a viatical settlement, designed for individuals facing a terminal or chronic illness. To qualify for a viatical settlement, policyholders typically have a life expectancy of 24 months or less, as certified by a medical professional. A viatical settlement involves selling the policy to a third party, who becomes the new owner and beneficiary, taking over premium payments.

Alternatively, a policyholder can choose to cash surrender their policy directly back to the issuing insurance company. This action terminates the policy, and the insurer pays the policyholder the accumulated cash value, minus any outstanding loans or surrender charges.

Another way to access policy value is through Accelerated Death Benefits (ADB), also known as living benefits, which are typically riders or provisions within the policy itself. ADBs allow policyholders with specific critical, chronic, or terminal illnesses to receive a portion of their death benefit while still alive.

Preparing for a Policy Sale

Before selling a life insurance policy, especially for a life or viatical settlement, gather specific information and documents. The original policy document is necessary to confirm policy details, including the type of policy, face value, and any riders. Recent policy statements provide current information on cash value, outstanding loans, and premium payment history.

Medical records are important for potential buyers to assess the policyholder’s health and life expectancy. This includes physician statements, diagnostic reports, and a comprehensive treatment history. Underwriters use this information to determine the fair market value of the policy. Financial information, such as policy loans or premium payment history, provides a complete financial picture.

Understanding the policy’s specific terms is an important preparatory step. Policyholders should review their contract for any surrender charges that might apply if the policy is terminated or transferred. Identify any outstanding policy loans, as these will typically be deducted from any settlement offer. Riders can also impact the policy’s value and should be noted.

General eligibility criteria for life settlements often include the policyholder’s age, with many providers requiring individuals to be at least 65 years old, and a declining health status. For viatical settlements, a certified life expectancy of 24 months or less is a primary eligibility factor. While permanent life insurance policies like whole life or universal life are typically eligible for settlements, term life policies are generally not, unless they are convertible to a permanent policy. Most settlement providers also have a minimum face value requirement, often starting at $100,000 or more.

The Life Settlement and Viatical Settlement Process

Once all necessary information and documents are compiled, the next step in a life or viatical settlement involves engaging with licensed professionals. Policyholders can work with a licensed life settlement provider, which is a company that directly purchases policies, or a life settlement broker, who represents the policyholder and solicits offers from multiple providers. Choosing a reputable and licensed entity is important, and their licensing status can often be verified through state insurance departments.

After selecting a broker or provider, the prepared information and documents are formally submitted for review. This submission typically includes policy details, financial records, and comprehensive medical history. The submission process may involve online portals, secure mail, or direct interaction with a representative.

Upon submission, the underwriting process begins, where the buyer assesses the policyholder’s health, life expectancy, and the policy’s financial characteristics. This assessment informs the offer amount, which reflects the present value of the future death benefit minus anticipated premiums and profit margins. If working with a broker, multiple offers may be solicited, allowing the policyholder to compare terms and choose the most favorable option.

Once an offer is accepted, the closing process involves signing a settlement agreement that outlines the terms of the sale. Policy ownership and beneficiary designations are then formally transferred from the original policyholder to the purchasing entity. After the transfer is complete and verified, the agreed-upon lump sum payment is disbursed to the policyholder, and the new owner assumes responsibility for all future premium payments.

Tax Implications of Policy Transactions

Understanding the tax implications of accessing value from a life insurance policy is important, as different transactions are treated distinctly by tax authorities. For life settlements, the proceeds are typically subject to taxation, with three potential components. The portion of proceeds representing the policyholder’s cost basis (total premiums paid) is usually received tax-free. Any gain received above the cost basis, up to the policy’s cash surrender value, is typically taxed as ordinary income. Any amount received in excess of the cash surrender value is generally taxed as a capital gain.

Viatical settlements often receive more favorable tax treatment under specific conditions. Proceeds from a viatical settlement are generally tax-exempt if the policyholder is certified by a licensed physician as being terminally ill with a life expectancy of 24 months or less. Similar tax exemptions may apply if the policyholder is chronically ill and meets certain criteria, such as being unable to perform at least two activities of daily living.

When a policy is cash surrendered, any amount received that exceeds the total premiums paid (the cost basis) is generally taxable as ordinary income. If the cash surrender value is less than or equal to the premiums paid, there is typically no taxable event. Accelerated Death Benefits are also generally tax-exempt for terminally or chronically ill individuals, mirroring the tax treatment of viatical settlements, provided the specific health criteria are met.

The specific tax rates for ordinary income and capital gains depend on the policyholder’s overall income and tax bracket. Given the complexity of tax laws, consulting a qualified tax advisor is advisable for personalized guidance on any policy transaction.