How to Sell a Term Life Insurance Policy

Life insurance policies, including term policies, represent a financial asset that may be sold under specific circumstances. Understanding the potential to convert this asset into immediate funds can be an important financial consideration. This article guides you through the possibilities and processes involved in selling a term life insurance policy.

Options for Selling a Term Life Policy

Selling a life insurance policy involves a life settlement, where an existing policy is sold to a third party. This third party, often an institutional investor, pays a sum greater than the policy’s cash surrender value but less than its net death benefit. The new owner takes over premium payments and receives the death benefit upon the insured’s passing.

A viatical settlement is for policyholders who are terminally or chronically ill. In this settlement, the policyholder sells their policy for a portion of its death benefit to a third party. This option provides immediate funds to individuals facing health challenges and associated expenses.

Pure term life policies do not accumulate cash value and cannot be sold directly in their original form. A prerequisite for selling a term policy is its convertibility feature. This feature allows conversion into a permanent policy, such as a universal life or whole life policy, without new medical underwriting.

Once converted, the policy becomes a permanent life insurance product eligible for a life or viatical settlement. This conversion entails new premium structures, often higher than original term premiums, and the potential to build cash value. A pure term policy might hold value if it has a very short remaining term and the insured has impaired health.

Determining Eligibility and Policy Value

Several factors determine a policy’s eligibility for sale and its potential value. Policyholder eligibility considers age, with life settlements involving individuals aged 65 or older. For viatical settlements, health status is the primary determinant, requiring a life expectancy of 24 months or less due to terminal or chronic illness.

Policy characteristics also play a role in salability and valuation. Policies with higher face amounts are attractive to buyers. Lower premium costs relative to the death benefit increase a policy’s appeal and value. The financial rating and reputation of the issuing insurance company influence buyer interest.

The valuation process involves assessing the policyholder’s health and life expectancy. This assessment relies on medical records, physician statements, and actuarial reports. Professional life expectancy underwriters analyze this information to project how long the insured is expected to live, which drives the policy’s market value.

After initial assessment, potential buyers submit bids based on their evaluation of the policy’s risk and future returns. The final offer is influenced by the competitive market among licensed providers and investors. Multiple bids are common, allowing policyholders to compare offers and negotiate for a higher payout.

Navigating the Sale Process

Selling a term life insurance policy begins with finding a licensed life settlement broker or provider. These entities facilitate the transaction between the policyholder and the purchasing investor. Verify that any chosen firm is licensed in the policyholder’s state and has a good reputation for ethical practices.

After selecting a broker or provider, submit an application. This application requires policy information, including policy numbers, face amount, and premium schedule. The policyholder must also authorize the release of medical records and other personal health information for underwriting.

Following application submission, the buyer conducts their own medical underwriting and review of the policyholder’s health. This independent assessment helps the buyer confirm the policyholder’s life expectancy, which directly impacts their offer. This review ensures all parties understand the underlying risk.

Once the medical review is complete, the policyholder receives and evaluates offers from various buyers. These offers detail the proposed purchase price and any associated fees. Comparing multiple offers ensures the policyholder receives the most favorable terms for their policy.

Upon offer acceptance, the transaction moves towards closing. This final stage involves signing legal documents, including the absolute assignment of policy ownership to the buyer. Funds are placed into an escrow account and released to the policyholder once the change of ownership with the insurance carrier is confirmed. The entire process can take several weeks to a few months.

Understanding Financial and Tax Outcomes

Proceeds from selling a life insurance policy are received as a lump sum payment. This amount is the gross offer from the buyer, less any fees or commissions charged by the life settlement broker and other administrative costs. Brokerage fees can range from 20% to 30% of the gross settlement amount, varying by policy value and transaction complexity.

The tax implications of a life or viatical settlement depend on factors like the policy’s cost basis and cash surrender value. The cost basis refers to the total premiums paid into the policy by the policyholder. For federal income tax purposes, the proceeds are categorized into three parts.

The portion of proceeds representing the return of the policyholder’s cost basis is received tax-free. Any amount above the cost basis but below the policy’s cash surrender value may be taxed as ordinary income. The portion exceeding both the cost basis and cash surrender value is taxed as a capital gain. For viatical settlements, if the insured is terminally or chronically ill as defined by federal law, the proceeds may be entirely tax-exempt.

Receiving a lump sum from a life settlement could affect eligibility for government benefits, such as Medicaid, as proceeds may be considered an asset. Due to tax laws and individual financial circumstances, consult a qualified tax advisor or financial planner before proceeding with a policy sale. These professionals provide personalized guidance and ensure compliance with applicable tax regulations.