How Much Can You Sell a Term Life Insurance Policy For?

Selling a term life insurance policy is a financial strategy for policyholders to access value from an asset they may no longer need. This transaction, known as a life settlement, allows a policyholder to receive a cash sum for their policy while still living. It provides liquidity, especially for those whose financial circumstances or needs have changed since the policy’s original purchase.

Understanding Life Settlements for Term Policies

A life settlement involves the sale of an existing life insurance policy to a third party, typically a life settlement provider or investor. In exchange for a lump-sum cash payment, the buyer assumes ownership of the policy, takes over future premium payments, and becomes the new beneficiary. The cash sum received by the policyholder is generally greater than any cash surrender value the policy might have, but it is less than the policy’s full death benefit.

While permanent life insurance policies, such as whole life or universal life, are more frequently associated with life settlements, term life policies can also be sold. Often, this requires converting the term policy into a permanent one before the settlement can be finalized. This conversion allows the policy to continue indefinitely, making it a more attractive asset for an investor who will eventually receive the death benefit.

Eligibility for a life settlement on a term policy depends on several factors. The insured individual is typically 65 years of age or older, though exceptions exist for those with serious health conditions. The policy needs a face value, or death benefit, of $100,000 or more, as smaller policies may not attract sufficient interest. The insured’s health status is also a criterion, as declining health or a significant health change since the policy was issued can make a policy more marketable.

These eligibility criteria directly influence the projected profitability of the investment. A shorter life expectancy for the insured means the investor anticipates paying premiums for a reduced period before receiving the death benefit. Larger policy amounts offer a more substantial potential return, justifying administrative and ongoing premium costs. The ability to convert a term policy to permanent coverage is also a consideration, ensuring the policy does not expire before the death benefit can be collected.

Factors Influencing Your Policy’s Value

The value of a term life insurance policy in a life settlement is determined by several variables that life settlement providers consider. The insured’s current age and health status are primary in this evaluation. A shorter life expectancy, often due to advanced age or a significant health impairment, generally leads to a higher offer because the buyer anticipates paying fewer premiums and receiving the death benefit sooner. For instance, individuals aged 65-74 typically need serious health impairments to qualify, while those 80 or above may qualify more readily based on age alone.

The policy’s death benefit amount also plays a role in its valuation. Larger policies, with a face value of $100,000 or more, are often more attractive to investors, as they represent a greater potential payout. While a $100,000 policy might yield an average payout of around $20,000, larger policies command more interest due to the higher absolute return. The size of the death benefit directly correlates with the potential profit for the buyer, influencing their willingness to offer a competitive sum.

Premium costs, both current and future, are another factor that can reduce the net present value of the death benefit for the buyer. Buyers assume responsibility for all ongoing premium payments after the sale, so policies with lower future premium obligations are more desirable. The higher the premiums, the more expensive it is for the investor to maintain the policy, which can result in a lower offer to the policyholder. Premium increases with age, averaging 8% to 10% annually for those in their 40s and up to 12% for those over 50, directly impact the buyer’s long-term costs.

For term policies specifically, the remaining term length and the ability to convert to a permanent policy are important. The cost and feasibility of this conversion, including any associated fees or new premium structures, will be factored into the offer. Policies that are easily convertible or have a significant remaining term, allowing for a smooth transition to permanent coverage, tend to be more valuable.

The Process of Selling Your Policy

The process of selling a term life insurance policy begins with gathering information. This involves locating the policy document to confirm details such as the policy number, death benefit amount, and current premium schedule. Obtaining personal medical history, including medical records and physician statements, is also part of this phase, as this information assesses the insured’s health status and life expectancy.

Once the information is compiled, the policyholder submits an application to a licensed life settlement provider or works with a life settlement broker. A broker can help shop for offers from various providers, potentially securing a more competitive price. The provider then conducts an underwriting process, which includes a review of medical records to assess the insured’s life expectancy. This assessment is a key component in determining the potential value of the policy to the buyer.

Following the underwriting review, policyholders receive offers from one or more life settlement providers. The offer amount will fall between the policy’s cash surrender value (if any) and the full death benefit. If the policyholder accepts an offer, the final steps involve legal documentation and the transfer of funds. This includes signing change of ownership and beneficiary forms, transferring the policy to the buyer.

Upon completion of the transfer paperwork, funds are disbursed to the policyholder. The entire process, from initial inquiry to receiving payment, can take several weeks to a few months, depending on the complexity of the case and the efficiency of the parties involved.

Tax Considerations for Life Settlements

The proceeds received from a life settlement transaction are subject to income tax, and the specific tax implications depend on several factors, including the policyholder’s cost basis in the policy. The cost basis is the total amount of premiums paid into the life insurance policy. It represents the policyholder’s investment in the contract for tax purposes.

The Internal Revenue Service (IRS) treats the portion of the life settlement proceeds that is equal to or less than the cost basis as a return of capital, which is tax-free. For example, if a policyholder paid $50,000 in premiums, and the settlement proceeds are $50,000 or less, that amount would generally not be subject to income tax. This tax-free treatment acknowledges that the policyholder is recouping their original investment.

Any amount of the life settlement proceeds that exceeds the cost basis but does not exceed the policy’s cash surrender value (if any) is taxed as ordinary income. This portion is viewed as accumulated earnings within the policy. For instance, if the premiums paid were $50,000, the cash surrender value was $60,000, and the settlement proceeds were $70,000, the $10,000 difference between the premiums paid and the cash surrender value would likely be ordinary income.

Any proceeds received above the policy’s cash surrender value are taxed as a capital gain. This applies to the portion of the settlement that reflects the market value of the policy as an asset. Using the previous example, the $10,000 received above the cash surrender value (from $60,000 to $70,000) would be treated as a capital gain. Due to the complexity of these tax rules and their potential impact on individual financial situations, consulting with a qualified tax advisor is recommended for personalized guidance.