How Much Can I Sell My Life Insurance Policy For?

Selling a life insurance policy, known as a life settlement, involves transferring ownership of an existing policy to a third party. This transaction provides the policyholder with a lump sum payment. The amount received is typically greater than the policy’s cash surrender value but less than its full death benefit. This financial option allows individuals to access a portion of their policy’s value during their lifetime.

A life settlement is distinct from surrendering a policy back to the insurance company. When a policy is surrendered, the insurer pays only the cash surrender value, if any, which is often a lower amount. A life settlement introduces a new buyer who assumes responsibility for future premiums and receives the death benefit upon the policyholder’s passing. This arrangement creates a market for policies that policyholders no longer need or can afford, offering a different financial alternative.

Factors Influencing Policy Value

The amount a policyholder can receive from a life settlement depends on several factors buyers evaluate. One factor is the policyholder’s age; older individuals generally receive higher offers. This is because the investor anticipates a shorter period until the death benefit is paid, making the investment more attractive.

The policyholder’s current health status and overall life expectancy are also assessed. Buyers conduct medical underwriting to determine an estimated life expectancy. A shorter life expectancy typically increases the policy’s value in a settlement.

The type of policy being sold impacts its value in the settlement market. Permanent life insurance policies, such as universal life, whole life, and convertible term policies, are generally eligible for life settlements. Term life policies may also qualify if they are convertible to a permanent policy.

The death benefit amount, also known as the face value, directly correlates with the potential settlement amount. Policies with higher death benefits command higher potential offers in a life settlement.

The remaining premium payments required on the policy influence the buyer’s offer. Buyers assume responsibility for these future premium payments after acquiring the policy. Policies with fewer remaining premium payments or lower ongoing costs are often more desirable to investors.

For permanent policies, the existing cash value is a consideration, though the settlement amount will always exceed this figure. While the cash surrender value is what the insurance company would pay if the policy were terminated, a life settlement offers a higher payout.

The Life Settlement Transaction Steps

A life settlement transaction begins with an inquiry to a licensed provider or broker. The policyholder or their financial advisor gathers documentation, such as the original policy, recent statements, and medical record authorization. This information helps assess the policy’s suitability and gather preliminary offers.

Following the inquiry, the buyer conducts an underwriting process. This involves reviewing the policyholder’s medical records to generate a life expectancy report. Based on this assessment and policy details, the buyer generates a formal offer for the policy.

Once offers are received, the policyholder, often with guidance from their advisor, reviews the proposed settlement agreements. This review allows consideration of the offer’s terms. If acceptable, the policyholder accepts it.

The next step involves the legal transfer of policy ownership and beneficiary rights. An escrow account holds the settlement funds. The policyholder signs an absolute assignment form, transferring all rights to the buyer. This makes the buyer the new legal owner.

Finally, the settlement funds are released from the escrow account. The policyholder receives the agreed-upon lump sum payment. This concludes the transaction, with the buyer assuming all future premium obligations and the right to the death benefit.

Understanding Net Proceeds

Understanding the net proceeds is important, as this represents the amount the policyholder receives after deductions. The gross offer is subject to costs and fees. These deductions include broker commissions, which can range from 20% to 30% of the gross settlement. Administrative, legal, and escrow fees are also subtracted from the gross offer.

Broker commissions compensate the life settlement broker for facilitating the transaction. Administrative and escrow fees cover operational costs. These fees reduce the payout to the policyholder.

The tax implications of life settlement proceeds are important. The Internal Revenue Service (IRS) generally treats proceeds in three parts for tax purposes. The amount received up to the policy’s cost basis (total premiums paid) is typically a tax-free return of capital. This portion is not subject to income tax.

Any amount received that exceeds the cost basis but not the cash surrender value is generally taxed as ordinary income. This portion is subject to the policyholder’s marginal income tax rate. For example, if a policy had a cost basis of $30,000 and a cash surrender value of $35,000, and the policyholder received $75,000, the $5,000 difference ($35,000 – $30,000) would be taxed as ordinary income.

Finally, any amount received that exceeds both the cost basis and the cash surrender value is generally taxed as a capital gain. This portion is subject to capital gains tax rates, which can vary depending on the policyholder’s income level and the duration for which the policy was held. The remaining amount from the example would be taxed as a long-term capital gain.

Given tax law complexities, policyholders should consult a tax advisor or financial planner. They can provide guidance on specific tax implications based on individual circumstances and current regulations. Understanding these potential tax liabilities helps calculate the net proceeds from a life settlement.