How to Sell Your Insurance Policy and What to Expect

Selling an insurance policy can provide immediate funds, converting a future death benefit into present liquidity. This process primarily involves life insurance policies, where ownership is transferred to a third party in exchange for a cash payment. Understanding this option can be valuable for individuals seeking to reallocate their financial resources. The decision to sell an insurance policy should align with evolving personal financial needs and objectives.

Policies Eligible for Sale

The primary type of insurance policy that can be sold is life insurance, allowing policyholders to monetize an asset they might no longer need or want. Within life insurance, two main types of settlements exist, distinguished largely by the health status of the insured individual: life settlements and viatical settlements.

A life settlement involves the sale of a life insurance policy by an individual who is typically aged 65 or older, or sometimes younger with certain health conditions, but not necessarily terminally ill. Permanent policies like whole life or universal life insurance are commonly eligible, and even convertible term policies can qualify if they transition to permanent coverage. For a policy to be considered, it generally needs a death benefit of at least $100,000 to $200,000.

Conversely, a viatical settlement is specifically for policyholders who are terminally or chronically ill, often with a life expectancy of 24 months or less. This type of settlement provides immediate financial relief, which can be crucial for covering medical expenses or living costs during a difficult health period. Other insurance types, such as standard term life insurance that is not convertible to a permanent policy, health insurance, auto insurance, or property insurance, are generally not eligible for sale in this manner.

Preparing to Sell

Before initiating the sale of a life insurance policy, it is essential to gather all pertinent information and documentation. This preparatory phase ensures a smoother process and allows for a comprehensive evaluation of the policy’s potential value.

Policy Information

Compile all specific policy information, including:
Policy type
Face amount (death benefit)
Current cash surrender value
Premium payment schedule
Policy number
Original issue date
Insurance company name
Confirmation that the policy is in force or paid-up

Personal and Medical Information

Gather detailed personal and medical information about the insured. This involves the insured’s full name, date of birth, and current health status. Comprehensive medical history, including physician contact information, hospital records, doctor’s notes, and diagnostic reports, is necessary for buyers to assess life expectancy.

Beneficiary Information

Identify all current beneficiaries listed on the policy and collect their contact information. This is important for ensuring proper changes can be made during the transfer of ownership.

Required Documentation

Collect all required documentation in physical or digital format. This typically includes:
Original policy contract
Recent premium statements
Signed medical release forms
Identification documents, such as a driver’s license or passport, to verify identity

The Sale Process

Once all necessary information and documents are prepared, the actual process of selling a life insurance policy can begin. This procedural phase involves several distinct steps, leading from initial contact with professionals to the final transfer of funds.

Finding a Professional

The first step involves finding a licensed professional to assist with the sale. You can engage with a life settlement broker or a life settlement provider. A broker acts as your representative, with a fiduciary duty to secure the highest possible offer by marketing your policy to multiple buyers. A provider is the entity that directly purchases policies, representing the investors who will own the policy.

Application and Valuation

After selecting a professional, the prepared application package containing policy and medical information is formally submitted. The policy then undergoes an underwriting and valuation process, where the life settlement provider evaluates the policy details and the insured’s health to determine a potential offer. This evaluation often includes assessing the insured’s life expectancy, which significantly influences the policy’s value to the buyer.

Offers and Closing

You will then begin receiving and evaluating offers from various providers. If you are working with a broker, they will typically facilitate a competitive bidding process among their network of buyers to maximize the sale price. Once an offer is accepted, the closing process begins, involving the signing of a sale agreement, formal transfer of policy ownership, and changing the beneficiary designation to the new owner.

Escrow and Fund Release

An independent escrow agent holds the sale funds until all conditions outlined in the contract are fulfilled, and the transfer of ownership is officially recorded by the life insurance carrier. This escrow arrangement ensures security and transparency. The final step is the release of funds from escrow to the seller, which typically occurs once the ownership change is confirmed. The entire process, from initial application to final payment, can generally take between six to eight weeks, although the ownership and beneficiary change itself might take up to 30 days depending on the insurance carrier.

Financial Considerations of the Sale

Selling an insurance policy involves specific financial outcomes that differ from simply surrendering the policy or letting it lapse. The cash payment received for a policy will be greater than its cash surrender value, if applicable, but always less than the full death benefit. For a standard life settlement, the payout typically ranges from 10% to 35% of the policy’s face value.

Viatical settlements often yield a higher percentage of the policy’s face value compared to life settlements, primarily because the insured’s shorter life expectancy makes the death benefit more imminent for the buyer. The payment is disbursed through an independent escrow agent, ensuring that funds are released only after all contractual obligations and transfers of ownership are verified.

The proceeds from both life and viatical settlements may be subject to federal and state income taxes. For life settlements, the portion of proceeds up to the amount of premiums paid into the policy (cost basis) is generally not taxable. Any proceeds received above the cost basis, up to the policy’s cash surrender value, are typically taxed as ordinary income. Amounts exceeding the cash surrender value are usually taxed as long-term capital gains.

Viatical settlements generally receive different tax treatment under federal law. If the insured is certified as terminally or chronically ill and meets specific Internal Revenue Service (IRS) requirements, the proceeds are typically considered an advance on the tax-free death benefit and are therefore not taxable. This tax-exempt status for viatical settlements is a significant financial consideration, though certain conditions must be met for this treatment to apply.