How Can You Sell a Life Insurance Policy?

Life insurance policies traditionally provide financial security to beneficiaries after the insured’s passing, but can also be sold during the policyholder’s lifetime. This option provides a way to access a portion of the policy’s value before death. Individuals might explore selling their policy if their financial circumstances change, if the original need for the coverage diminishes, or if they face unexpected expenses. Selling a life insurance policy offers an alternative to simply lapsing the policy or surrendering it for its cash value, which often yields a lower payout.

Understanding Life Settlement and Viatical Settlement Options

Selling a life insurance policy involves two primary methods: a life settlement or a viatical settlement. Both involve selling an existing policy to a third party for a cash payment less than the death benefit but more than its cash surrender value. The buyer assumes responsibility for future premium payments and receives the death benefit when the insured dies.

A life settlement involves selling a policy by an individual who is 65 or older and not terminally or chronically ill. Policyholders may pursue a life settlement if they no longer need the coverage, can no longer afford the premiums, or require funds for other expenses like long-term care. Buyers are usually institutional investors or companies that acquire the policy as an investment.

A viatical settlement is for individuals who are terminally or chronically ill, often with a life expectancy of two years or less. This option allows those facing severe health challenges to access immediate cash to cover medical bills, hospice care, or to improve their quality of life. Viatical settlements tend to have higher payouts than life settlements due to the insured’s shorter life expectancy, meaning the buyer anticipates a quicker return. The buyer, often a viatical settlement provider, assumes all future premium payments and becomes the policy’s beneficiary.

Preparing for a Policy Sale

Before selling a life insurance policy, thorough information gathering is essential. This initial phase helps determine the feasibility and potential value of a life settlement. The policyholder must collect specific policy details to present to potential buyers.

This includes:

• Policy type (e.g., whole life, universal life, convertible term life). Permanent policies are commonly accepted, and term policies may qualify if convertible.
• Policy’s face amount (death benefit), typically at least $100,000.
• Policy’s cash surrender value and premium payment schedule (amount and frequency).
• Issuing insurance carrier and policy’s issue date.

Beyond policy specifics, personal health information of the insured is required. This involves accurate age details, as older individuals (over 65) or those with certain medical conditions are more likely to qualify. Medical records are a significant component, used by potential buyers to assess life expectancy. These may include recent medical reports, physician statements, and a comprehensive health history. For viatical settlements, a physician’s certification of terminal or chronic illness with a defined life expectancy is necessary.

Engaging a life settlement broker or provider can be beneficial. A broker represents the policyholder and assists in gathering necessary policy and medical information, acting as a fiduciary to secure the best offer. They often request detailed documentation for an initial valuation, such as copies of the original policy, premium statements, and identification. The broker or provider uses this data for a preliminary assessment, which may involve independent life expectancy underwriting. This comprehensive collection of information forms the foundation for a successful policy sale.

The Sale Process

Once necessary information and documents are gathered, the formal process of selling a life insurance policy can begin. This involves several steps, starting with contact with a life settlement broker or directly with a provider. A broker typically markets the policy to multiple buyers to secure competitive offers, acting in the policyholder’s best interest.

After initial contact, prepared documentation, including policy details and medical records, is submitted for evaluation. Potential buyers, directly or through a broker, conduct their own underwriting. This involves a thorough review of submitted information, particularly medical records, to determine the insured’s life expectancy, a primary factor in their offer. During this period, the policyholder may need to provide additional clarifications or updated information as requested.

After underwriting is complete, potential buyers extend offers to purchase the policy. If working with a broker, they present all bids received, allowing the policyholder to compare and evaluate offers. The policyholder can then accept an offer that aligns with their financial needs and expectations. Should an offer be accepted, the process moves to the final stages of transferring ownership.

The policyholder signs a purchase agreement, a legally binding contract outlining the terms of sale. This is followed by completing paperwork to transfer policy ownership and change the beneficiary designation to the buyer. A third-party escrow agent or trustee is often involved to ensure a secure transaction, holding funds and documents until conditions are met. Once the transfer is finalized, the agreed-upon cash payment is released to the seller, concluding the transaction.

Key Financial Considerations

Several financial factors influence a life insurance policy’s sale value and tax implications for the seller. The policy’s sale value is affected by the insured’s age and health, as these determine life expectancy. A shorter life expectancy leads to a higher payout, as the buyer anticipates receiving the death benefit sooner and making fewer premium payments.

The policy type (e.g., universal life or whole life) and its death benefit amount also play a role, with larger death benefits yielding higher offers. Premium costs for maintaining the policy are considered, as buyers assume these expenses. Current interest rates and market conditions can influence the attractiveness and pricing of policies to investors.

Proceeds from selling a life insurance policy have specific tax implications, differing between life settlements and viatical settlements. For life settlements, proceeds are taxable. Taxation follows a three-tier structure: the amount received up to the policy’s cost basis (total premiums paid) is tax-free. Any amount exceeding the cost basis but not exceeding the policy’s cash surrender value is taxed as ordinary income. Any remaining proceeds above the cash surrender value are taxed as long-term capital gains.

Viatical settlements are not considered taxable income if the insured is certified as terminally ill (24 months or less to live) or chronically ill, provided specific conditions are met. For chronically ill individuals, the proceeds may be tax-free if used for qualified long-term care expenses. This tax-exempt status is due to the Health Insurance Portability and Accountability Act (HIPAA) of 1996, which treats these proceeds as an advance on the tax-free life insurance death benefit. Given the complexity, consulting with a tax professional for advice is advisable.