How Much Can You Sell a Life Insurance Policy For?

Life insurance policies, traditionally viewed as instruments for protecting beneficiaries, can also function as assets that policyholders may sell for cash. The potential sale price of such a policy depends on several factors, including the policy type, the insured’s health, and prevailing market conditions. Understanding these elements is important for anyone considering liquidating a life insurance policy.

Understanding Life and Viatical Settlements

Selling a life insurance policy to a third party is known as a life settlement. In this transaction, a policyholder sells an existing life insurance policy for a cash sum that is greater than the policy’s cash surrender value but less than the full death benefit. The buyer then assumes responsibility for all future premium payments and receives the death benefit when the insured passes away.

A viatical settlement is a specific type of life settlement tailored for individuals with a chronic or terminal illness. This applies to policyholders with a life expectancy of two years or less. The distinction between a life settlement and a viatical settlement is the insured’s health status; a viatical settlement involves a significantly shortened life expectancy due to severe illness. Both types of settlements provide access to funds that might be needed for various reasons, such as covering medical expenses, funding retirement, or eliminating premium obligations on a policy no longer desired.

Factors Influencing Policy Value

The amount a life insurance policy can be sold for is determined by a combination of factors. The insured’s age and health are significant considerations; older age and declining health can increase a policy’s value to a buyer because it suggests a shorter life expectancy for the insured, leading to a sooner payout of the death benefit. Buyers assess life expectancy through medical underwriting, which involves reviewing the insured’s medical records.

The type of policy also plays a substantial role in its marketability. Permanent life insurance policies, such as whole life or universal life, are typically more suitable for settlements due to their guaranteed death benefit and potential cash value accumulation. While term life policies are less common for settlements, convertible term policies that can be converted into permanent coverage may also be eligible. The death benefit amount is another direct determinant; policies with larger death benefits command higher settlement offers.

Future premium costs associated with the policy also affect its value. Lower projected premium payments make a policy more appealing to a buyer, which can translate into a higher sale price. Policies that have been in force for a certain period, often two or more years, are more marketable, as some states may have seasoning requirements. Broader market conditions, including prevailing interest rates and the level of competition among life settlement providers, can influence the offers extended to policyholders.

The Policy Sale Process

Initiating the sale of a life insurance policy begins with gathering detailed information about the policy itself. This includes the policy number, the issuing insurance company, the policy type, its death benefit amount, any accumulated cash value, and the current premium payment schedule. Policyholders often contact a licensed life settlement broker or provider to explore their options and begin the process.

Medical underwriting is a key evaluation step, where the insured provides medical records and health information. This information is reviewed by buyers to assess the insured’s life expectancy, a primary factor in determining policy value. After this assessment, providers will appraise the policy and may extend an offer. Policyholders should solicit multiple offers, often through a broker, to ensure a competitive price.

Once an offer is accepted, the policyholder proceeds to the documentation and closing phase. This involves the formal transfer of policy ownership and the designation of the new beneficiary to the purchasing entity. The funds from the sale are placed into an escrow account and disbursed to the seller once the ownership transfer is confirmed with the insurance company. The life insurance company is then notified of the change in ownership and beneficiary.

Tax Implications

Life settlement proceeds are subject to federal and state income tax, with the Internal Revenue Service (IRS) categorizing them into three components for tax purposes. The amount up to the policy’s cost basis (total premiums paid) is considered a tax-free return of capital. Any portion of the proceeds exceeding the cost basis but not exceeding the policy’s cash surrender value is taxed as ordinary income. Any remaining proceeds that exceed both the cost basis and the cash surrender value are taxed as capital gains. This tiered tax structure means that while a portion may be tax-free, other parts will be subject to taxation at different rates.

For viatical settlements, the tax treatment can differ. Proceeds from a viatical settlement are tax-exempt at the federal level if the insured is certified as terminally ill, with a life expectancy of 24 months or less. Chronically ill individuals may also receive tax-exempt proceeds if the funds are used for qualified long-term care expenses. However, specific conditions apply, and consult a qualified tax advisor to understand the tax implications based on individual circumstances and current tax laws.