How to Sell My Life Insurance Policy for Cash

Selling a life insurance policy means converting its value into immediate cash or transferring its ownership. This involves the policyholder liquidating or reassigning an existing policy. Policyholders can explore various avenues, from direct insurer interactions to third-party transactions. These methods offer different financial outcomes and considerations.

Accessing Your Policy’s Cash Value

Permanent life insurance policies, such as whole life or universal life, accumulate a cash value over time, distinct from the death benefit. This cash value grows tax-deferred and can serve as a financial asset accessible during the policyholder’s lifetime. Policyholders can ascertain their policy’s cash value by reviewing annual statements or contacting their insurance company directly. Understanding this value is the first step.

One method to access value directly from the insurer is policy surrender, which involves terminating the life insurance policy in exchange for its cash surrender value. To initiate this, policyholders contact their insurance company and submit a surrender request form. The cash surrender value equals the accumulated cash value less any surrender charges, fees, or outstanding loans. This action permanently ends the insurance coverage, meaning no death benefit will be paid.

Policyholders can also borrow against their policy’s cash value without terminating the coverage. A policy loan uses the cash value as collateral, providing access to funds without a credit check and flexible repayment terms. Unpaid loan balances, including accrued interest, will reduce the death benefit paid to beneficiaries if not repaid before the insured’s death. While repayment is not mandatory, consistent interest accrual can deplete the cash value, potentially causing the policy to lapse if the loan balance exceeds the cash value.

For universal life insurance policies, partial withdrawals from the cash value are another option. These withdrawals reduce the policy’s cash value and the death benefit. Funds withdrawn up to the amount of premiums paid are generally tax-free. However, any portion exceeding total premiums paid may be taxed as ordinary income.

Selling Your Policy to a Third Party

Policyholders can also sell their life insurance policy to a third party. This transaction, known as a life settlement, involves selling an existing life insurance policy for a lump sum greater than its cash surrender value but less than the full death benefit. Eligibility for a life settlement requires the policyholder to be at least 65 years old, or younger with significant health impairments, and the policy to have a death benefit of at least $100,000.

A specific type of life settlement is a viatical settlement, designed for policyholders with a life-threatening or chronic illness. To qualify for a viatical settlement, the insured needs a life expectancy of 24 months or less, as certified by a physician. Individuals with a chronic illness who cannot perform at least two activities of daily living may also qualify. Viatical settlements provide a higher percentage of the death benefit compared to standard life settlements due to the shorter life expectancy.

The process of selling a policy to a third party begins by finding a life settlement provider or broker. A broker represents the policyholder, marketing the policy to multiple buyers to secure the highest offer, and earns a commission from the sale proceeds. A provider purchases policies directly, either for their own investment portfolio or on behalf of investors. Policyholders submit an application, providing medical records and policy details for underwriting by potential buyers.

After underwriting, potential buyers submit offers. The policyholder can accept an offer, leading to the transaction’s closing. The closing involves transferring policy ownership and beneficiary rights to the buyer, and the agreed-upon payment is released to the seller, often through an escrow agent. Once complete, the new owner assumes responsibility for all future premium payments and receives the death benefit.

Tax Implications of Policy Transactions

Understanding the tax implications of accessing or selling a life insurance policy is important, as different transactions carry distinct tax consequences. When a policy is surrendered, any amount received exceeding total premiums paid is generally considered a taxable gain. This gain is taxed as ordinary income, rather than a capital gain. Policyholders may also incur surrender charges, which reduce the net payout.

Policy loans are not considered taxable income, provided the policy remains in force. The IRS views these as advances against the policy’s cash value, not income. However, if the policy lapses with an outstanding loan balance, the portion exceeding total premiums paid may become taxable income. Similarly, withdrawals from universal life policies are tax-free up to the amount of premiums paid, but any amount exceeding this basis is taxed as ordinary income.

For life settlements, the tax treatment of proceeds is structured in tiers, according to the Tax Cuts and Jobs Act of 2017 and IRS Revenue Rulings 2009-13 and 2020-05. The amount received up to total premiums paid (cost basis) is generally tax-free. Any proceeds exceeding the cost basis but not the cash surrender value are taxed as ordinary income. Any amount received above the policy’s cash surrender value is taxed as a capital gain.

Viatical settlements have more favorable tax treatment due to the policyholder’s health status. Under the Health Insurance Portability and Accountability Act (HIPAA) of 1996, proceeds from a viatical settlement are generally tax-free for terminally ill individuals, defined as having a life expectancy of 24 months or less, as certified by a physician. For chronically ill individuals, proceeds can also be tax-free if used for qualified long-term care expenses. These transactions may require reporting on IRS Form 1099-LTC for tax-exempt payments or Form 1099-R for other distributions.