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

A term life insurance policy, designed for financial protection over a specific period, can sometimes be sold. This allows policyholders to access a portion of its death benefit while living. Understanding the factors and steps involved is crucial for those considering this option.

Understanding Policy Convertibility and Eligibility

Unlike permanent life insurance, term life insurance covers a defined period and does not accumulate cash value, meaning it cannot be directly sold like a permanent policy with a cash component. Many term policies include a “term conversion” feature, allowing conversion to a permanent policy (e.g., whole life or universal life) without a new medical exam.

This conversion is crucial because permanent policies build cash value, leveraged in a life settlement. Conversion clauses often have specific timeframes (e.g., within the first five to ten years, or before age 65-75). Policyholders must confirm convertibility and then convert to a permanent form before selling.

Once converted, a policy may become eligible for a life settlement or a viatical settlement. A life settlement involves selling an existing life insurance policy to a third party for more than its cash surrender value but less than its net death benefit. This option is available to policyholders aged 65 or older, or those with a significant health change impacting life expectancy.

A viatical settlement is for terminally or chronically ill individuals. To qualify, the policyholder needs a life expectancy of 24 months or less, certified by a medical professional. Both provide immediate funds, differing primarily based on the insured’s health status.

Determining Policy Value

The potential sale value of a life insurance policy depends on factors buyers consider. Life settlement companies assess the policy as an investment, aiming to profit from the future death benefit. The insured’s health and life expectancy are primary drivers of the offer. A shorter life expectancy, indicating an earlier payout, results in a higher offer, reducing the period the buyer must pay premiums.

Life settlement providers review medical records to determine life expectancy, examining past diagnoses, current health conditions, and treatment plans. The policy’s face value, or death benefit, also significantly influences the potential offer, representing the maximum payout the buyer will eventually receive. Policies with higher death benefits command larger settlement offers.

Ongoing premium costs are another factor. Buyers factor in total future premiums until the policy matures. Policies with lower remaining premium obligations or “paid-up” policies yield higher offers, reducing the buyer’s future expenses.

Any riders attached to the policy can affect its value. For example, an accelerated death benefit rider might reduce attractiveness if utilized or if it presents a risk of future utilization. Overall market conditions, including interest rates and demand for life settlement investments, also influence offers. These factors determine the present value of the future death benefit, directly impacting the amount offered.

The Sale Process

Selling a life insurance policy begins with engaging a licensed life settlement broker or provider. Policyholders research and contact licensed entities to compare services and offers. These professionals serve as intermediaries, guiding the seller and soliciting bids from various funding sources.

Upon engagement, the broker or provider requests comprehensive personal and policy information, including detailed medical records, original policy documents, and premium payment history. This allows the life settlement firm to conduct its initial assessment and obtain life expectancy reports from specialized medical underwriting firms.

With this information and life expectancy reports, the broker or provider solicits offers from multiple institutional investors and funding entities. These entities review policy details and the insured’s medical profile to determine their proposed purchase price. The seller then receives and evaluates these offers, which can vary significantly based on each buyer’s investment criteria.

Once an offer is accepted, the process moves into a due diligence phase, where the buyer verifies all submitted information. This often involves direct communication with the insurance carrier to confirm policy details and ownership. Following verification, closing documents are prepared, including assignments of policy ownership and changes to beneficiary designations, naming the buyer as the new owner and beneficiary.

The final step involves the transfer of funds. The agreed-upon settlement amount is placed into an escrow account, ensuring all contractual obligations are met before funds are released. Once the insurance company confirms the change of ownership, funds are disbursed from escrow to the seller, completing the transaction. This entire process can take several weeks to a few months, depending on the case and responsiveness of all parties.

Financial and Tax Considerations

When selling a life insurance policy, the amount received is not always the gross settlement figure. Various fees and costs are deducted from the gross proceeds. Broker commissions, ranging from 10% to 30% of the gross settlement, are often the largest deduction. Administrative costs, such as legal fees, escrow fees, and charges for obtaining medical records and life expectancy reports, also reduce the net amount.

The tax treatment of life settlement proceeds is complex. Proceeds are taxed based on three components. The portion representing premiums paid into the policy, known as the “cost basis,” is received tax-free.

Any amount exceeding the cost basis but less than the policy’s cash surrender value is taxed as ordinary income. Any proceeds above the cash surrender value are taxed as a capital gain. For example, if a policy sold for $100,000, with $20,000 in premiums paid and a $30,000 cash surrender value, $20,000 would be tax-free, $10,000 ($30,000 – $20,000) as ordinary income, and $70,000 ($100,000 – $30,000) as a capital gain.

An exception applies to viatical settlements. Under federal law, proceeds from a viatical settlement are tax-exempt if the insured is certified as terminally ill (with a life expectancy of 24 months or less) or chronically ill, provided certain conditions are met as outlined in Internal Revenue Code Section 101.

Receiving a lump sum from a life settlement can impact eligibility for means-tested government benefits, such as Medicaid or Supplemental Security Income (SSI). The increase in assets might push an individual above financial thresholds, potentially leading to a loss of benefits. Consulting with a qualified financial advisor and a tax professional is recommended before proceeding. These professionals can provide guidance, assess tax implications, and help navigate the impact on other financial benefits.