How Does Selling a Life Insurance Policy Work?

Understanding Policy Sales

A life insurance policy can be sold as an asset through a life settlement. This process allows a policyholder to sell their existing policy to a third party for a cash sum. This amount is typically greater than the policy’s cash surrender value but less than the full death benefit. Policyholders generally pursue a life settlement when their life expectancy exceeds two years.

A related transaction is a viatical settlement, designed for individuals who are terminally or chronically ill, typically with a life expectancy of two years or less. Both life and viatical settlements provide immediate liquidity to policyholders who no longer need or can afford their existing coverage. These transactions offer an alternative to lapsing or surrendering a policy, which typically results in a lower financial return.

Certain types of life insurance policies are eligible for sale, including whole life, universal life, and convertible term policies. These policies typically build cash value or can be converted into a permanent policy, making them attractive to buyers. Pure term life policies, which do not accumulate cash value and expire, are usually not eligible unless they possess a conversion feature.

Upon the sale of the policy, the buyer assumes ownership and becomes responsible for all future premium payments. In exchange, the buyer receives the death benefit when the insured passes away. This transfers the financial obligation from the original policyholder to the new owner, providing the seller with immediate cash.

Assessing Policy Value

The value of a life insurance policy in a settlement is influenced by several factors. A policyholder’s health and life expectancy are primary considerations, as a shorter life expectancy generally increases the policy’s appeal to a buyer. This is because the buyer anticipates receiving the death benefit sooner.

The policy type and its death benefit amount also play a significant role. Policies with larger death benefits command higher offers, reflecting the greater payout the buyer will eventually receive. Permanent policies, such as whole life or universal life, are typically more valuable than term policies because they guarantee a death benefit payout.

Future premium payments owed on the policy are another important factor. Policies with lower ongoing premium obligations are more desirable, as they reduce the buyer’s long-term costs. Policies that are paid up or have low annual premiums tend to yield higher settlement offers.

The settlement value obtained is typically higher than the policy’s cash surrender value. While surrendering a policy only returns its accumulated cash value, a life settlement provides a sum that accounts for the future death benefit, making it a more financially advantageous option. Market conditions and demand from institutional investors also influence offers.

To facilitate an accurate valuation, a seller needs to gather documentation and information. This includes policy documents, premium statements, and medical records. Medical records are necessary for buyers to assess the insured’s health and life expectancy.

Steps to Selling a Policy

Selling a life insurance policy begins by contacting licensed life settlement brokers or direct providers. Brokers act as intermediaries, representing the seller and soliciting offers from multiple providers. Direct providers purchase policies themselves. Engaging a broker can be beneficial as they secure the highest offer through competitive bidding.

Once a broker or provider is chosen, the next step is submitting required documents for evaluation. This includes policy details, such as the policy number, issuing company, death benefit, and premium schedule. The seller must also authorize the release of medical records, allowing the buyer to assess the insured’s life expectancy.

After evaluation, the seller receives and reviews offers. If working with a broker, they present all offers, allowing the seller to compare terms and choose the most favorable option. Offers vary based on each provider’s financial models, risk assessment, and investment strategies.

Upon accepting an offer, the buyer conducts final due diligence to verify submitted information. This involves communication with the insurance carrier to confirm the policy’s active status, premium payment history, and beneficiary designations.

The legal process involves transferring ownership and beneficiary designation. The seller formally assigns the policy to the buyer by completing forms from the insurance company and settlement provider. This transfers all policy rights and responsibilities to the new owner, including future premiums and the death benefit.

After ownership transfer is complete and verified, proceeds are disbursed to the seller. Funds are transferred to an escrow account. The process, from initial contact to receipt of funds, can take several weeks to months.

Financial Considerations

When a life insurance policy is sold, the seller receives a lump sum payment. This provides immediate liquidity, which would otherwise only be available upon the insured’s passing or by surrendering the policy. The amount received is greater than the policy’s cash surrender value but less than its full death benefit.

The taxation of these proceeds is a financial consideration. A portion of the proceeds may be a tax-free return of premiums paid. Any amount received above this, up to the cash surrender value, may be subject to ordinary income tax. Proceeds exceeding the cash surrender value might be taxed as capital gains.

For viatical settlements, tax exemptions may apply under federal law. If the insured is certified as terminally ill, typically with 24 months or less to live, proceeds are generally tax-exempt. Tax laws are complex, so consulting a qualified tax professional is advised.

Receiving a lump sum from a policy sale can affect eligibility for certain government benefits. Programs like Medicaid or SSI impose asset limits, and a substantial cash sum could impact eligibility. This is important for individuals relying on such benefits.

Before finalizing a settlement, consult a financial advisor or benefits administrator. These professionals can help assess the impact of settlement proceeds on government benefit eligibility. This helps avoid unintended consequences and ensures the sale aligns with the seller’s financial plan.