How to Sell My Whole Life Insurance Policy

Whole life insurance policies are a type of permanent life insurance that offer a death benefit alongside a cash value component. This cash value grows over time on a guaranteed basis, accumulating funds that can be accessed by the policyholder during their lifetime.

Surrendering Your Policy

Surrendering a whole life insurance policy involves canceling the contract with the insurer in exchange for its cash surrender value. This action terminates the policy. The cash surrender value represents the accumulated cash value within the policy, minus surrender charges, outstanding loans, or unpaid premiums. Surrender charges, which can be significant, typically decrease over time and may disappear after a period of 10 to 15 years.

Before initiating the surrender process, gather information such as your policy number and personal identification details. Contact the insurance company through their customer service line or online portal to express your intent to surrender the policy. They will provide the necessary forms and inform you of requirements or fees that apply to your situation.

Upon receiving the surrender forms, complete all required sections. These forms often include a surrender discharge form, which formally communicates your decision to terminate the policy. You may also need to provide an Electronic Funds Transfer (EFT) mandate form for direct deposit of funds, along with identification documents, the original policy document, and a voided check.

Once the forms are completed, submit them to the insurance company via their specified method, such as mail or online submission. After the insurer processes your request, which takes around 30 days, you will receive the cash surrender value as a lump sum. Concurrently, the insurance company will issue a confirmation that the policy has been terminated.

Selling Through a Life Settlement

A life settlement involves selling a whole life insurance policy to a third-party investor for a cash payment. This amount is generally greater than the policy’s cash surrender value but less than its death benefit. The buyer assumes responsibility for future premium payments and receives the death benefit when the insured passes away. This option provides an alternative to surrendering a policy, especially when the policy is no longer needed or its premiums have become unaffordable.

To begin the process, you will need to provide information for an initial evaluation of your policy’s value. This includes details such as the type of policy, its face amount, current cash value, and premium schedule. Additionally, the investor will require health information about the insured, including medical records and life expectancy, as these factors influence the policy’s market value.

Selecting a reputable life settlement broker or direct provider is a step. A broker acts on your behalf, helping to navigate the complexities of the transaction and soliciting offers from multiple buyers. Look for licensed entities with established industry experience and transparency regarding their fees and processes. While direct providers purchase policies, a broker can help ensure you receive competitive bids by marketing your policy to a wider network of buyers.

Once a broker or provider is chosen, you will complete an application and submit policy and health information. This application often includes authorizations for the broker or provider to obtain medical records and policy details directly from your healthcare providers and insurance company. Multiple buyers will review your information and submit offers, which your broker will then present to you for evaluation.

Upon accepting an offer, the closing process begins, requiring legal and policy documents to finalize the sale. These include the original policy document, assignment of ownership forms, and beneficiary change forms to transfer to the buyer. The transaction concludes with the transfer of policy ownership to the buyer and the disbursement of funds to you, often held in an escrow account until the ownership transfer is confirmed.

Tax Implications

Proceeds from liquidating a whole life insurance policy, whether through surrender or a life settlement, have distinct tax implications. Understanding these can help you anticipate tax liabilities. Consult a tax professional for advice regarding your situation.

When surrendering a whole life insurance policy for its cash value, any amount received above your “cost basis” is considered taxable income. Your cost basis refers to premiums you have paid into the policy, less any tax-free distributions or dividends received over the years. If the cash surrender value exceeds this cost basis, the gain is taxed as ordinary income. For example, if you paid $40,000 in premiums and received a $55,000 cash surrender value, the $15,000 gain would be subject to ordinary income tax rates.

The taxation of proceeds from a life settlement follows a three-tiered structure. The first portion of the payment, up to your cost basis (premiums paid), is generally received tax-free. For instance, if you paid $40,000 in premiums, the first $40,000 of the settlement proceeds would not be taxed.

The second tier of taxation applies to the amount received above your cost basis but up to the policy’s cash surrender value. This portion is taxed as ordinary income. For example, if the cash surrender value was $55,000 and your cost basis was $40,000, the $15,000 difference ($55,000 – $40,000) would be taxed as ordinary income.

Finally, any amount received from the life settlement that exceeds the policy’s cash surrender value is taxed as a capital gain. This portion may benefit from more favorable capital gains tax rates. For example, if the settlement was $70,000, and the cash surrender value was $55,000, the remaining $15,000 ($70,000 – $55,000) would be taxed as capital gains. Both surrendered policies and life settlements require reporting to the Internal Revenue Service (IRS).