How to Sell Your Life Insurance Policy

Selling a life insurance policy allows policyholders to access a portion of their policy’s value while still living. This converts an illiquid asset into immediate cash. It is an option for those whose financial needs or life circumstances have evolved since the policy’s original purchase.

Understanding Policy Sale Options

Two primary avenues exist for selling a life insurance policy: life settlements and viatical settlements. Both involve transferring policy ownership to a third-party buyer for a cash payment. The buyer then assumes responsibility for future premium payments and receives the death benefit when the insured passes away.

A life settlement typically applies to policyholders generally aged 65 or above who no longer need or can afford their coverage. This option allows individuals to unlock financial value from a policy they might otherwise surrender or let lapse. The payout received is usually more than the policy’s cash surrender value but less than its full death benefit.

A viatical settlement is designed for policyholders facing a terminal or chronic illness, often with a life expectancy of two years or less. This settlement provides financial resources for individuals needing funds to cover medical expenses or improve their quality of life. While the process is similar to a life settlement, the insured’s health status is the distinguishing factor. Viatical settlements often yield a higher percentage of the policy’s face value.

Assessing Policy Eligibility and Value

Several factors determine a life insurance policy’s eligibility for sale and influence its potential market value. The policyholder’s age is a significant consideration; individuals generally aged 65 or older are more attractive candidates for life settlements, as their shorter life expectancy makes the policy more appealing. Younger policyholders may qualify if they have a serious health condition that reduces their life expectancy.

The insured’s health status and life expectancy are paramount, directly affecting the policy’s value. Buyers assess medical records to estimate how long the insured is expected to live, as this dictates how long premiums will be paid before the death benefit is received. Policies with a shorter life expectancy typically command higher offers because the buyer anticipates receiving the death benefit sooner.

Policy type also plays a role in eligibility. Permanent life insurance policies, such as universal life and whole life, are commonly sought after as they build cash value and offer guaranteed benefits. While term life policies are generally less common for settlements, they may qualify if they include a conversion feature to permanent coverage or if the insured is terminally ill.

The policy’s face value, or death benefit, is another critical element. Policies typically require a death benefit of at least $100,000 to be considered for sale. Larger death benefits, often $500,000 or more, tend to be more appealing. Premium payment history and ongoing costs also influence attractiveness, as buyers prefer policies with manageable premiums. Any outstanding loans against the policy’s cash value must be repaid from the settlement proceeds, affecting the net payout. The overall market value is a complex calculation, usually resulting in a lump sum payment more than the cash surrender value but less than the death benefit.

Preparing Necessary Information and Documents

Gathering a comprehensive set of information and documents is required to initiate the sale process. The original life insurance policy document is essential, as it contains critical details about terms, conditions, and face value, confirming ownership and verifying specifics.

Medical records are crucial for assessing the insured’s health status and estimating life expectancy. These records should include specific diagnoses, treatment histories, and physician’s notes. Policyholders can obtain these from their healthcare providers. A signed HIPAA authorization form is necessary to allow potential buyers or brokers to access these confidential medical details, to ensure patient privacy compliance.

Contact information for all healthcare providers is also needed to facilitate the collection of up-to-date medical information. This includes names, addresses, and phone numbers of doctors, specialists, and hospitals. Financial statements related to the policy, such as premium payment history, cash value statements, and any outstanding loan balances, provide a clear financial picture. These can be requested from the life insurance company. Beneficiary information, including names and relationships, will also be required to facilitate the transfer of ownership and beneficiary rights.

Navigating the Sale Process

Once all necessary information and documents are gathered, the next step involves submitting the application package to a life settlement provider or broker. This package includes medical records, policy details, and authorization forms. The provider or broker then reviews the submission for completeness and accuracy, ensuring all required elements are present.

Following submission, the policy undergoes a medical underwriting review by the buyer. This involves a detailed assessment of the insured’s health status and life expectancy, often conducted by a third-party medical underwriter. Buyers analyze the provided medical records to project the insured’s lifespan, which is a key determinant in their offer. This step helps the buyer gauge the policy’s risk and potential profitability.

After the underwriting review, potential buyers or brokers will present offers for the policy. The policyholder receives and evaluates these offers, comparing the proposed cash payouts and considering any associated fees or commissions. Brokers often solicit multiple offers from various providers to help secure the most favorable terms.

Upon accepting an offer, the buyer conducts due diligence, verifying all information and ensuring the policy is free of encumbrances. This may include confirming policy details with the original insurer and any outstanding liens or issues. The closing process then commences, requiring the policyholder to sign transfer documents that transfer ownership of the policy to the buyer. This also includes changing the beneficiary designation to the new policy owner.

Finally, upon completion of the transfer and all legal formalities, the agreed-upon payment is disbursed to the policyholder. This lump sum payment is typically placed into an escrow account to ensure fund safety during the policy transfer. The new owner then assumes responsibility for all future premium payments, and upon the insured’s death, will receive the death benefit.

Taxation and Policy Status After Sale

Selling a life insurance policy has distinct tax implications that vary depending on the type of settlement and the policyholder’s health status. For a life settlement, where the insured is not terminally or chronically ill, the proceeds are typically subject to taxation. The amount received up to the total premiums paid into the policy (cost basis) is generally tax-free. Any amount received above the premiums paid, up to the policy’s cash surrender value, is usually taxed as ordinary income. Any remaining proceeds, representing the gain above the cash surrender value, are generally taxed as capital gains.

In contrast, proceeds from a viatical settlement, where the policyholder is terminally or chronically ill and meets specific IRS requirements, are generally considered tax-free. The Internal Revenue Service treats these payments as an advance on the life insurance death benefit, which is typically not taxable. For chronically ill individuals, the proceeds are tax-free if used for qualified medical or long-term care expenses not covered by other insurance. It is advisable to consult with a qualified tax professional to understand the tax consequences for your specific situation.

After the sale, the status of the life insurance policy changes significantly. The original policyholder relinquishes all ownership and control over the policy. The new owner becomes responsible for paying all future premiums to keep the policy in force. This means the original policyholder no longer has financial obligations related to the policy. The original beneficiaries no longer have a claim to the death benefit. Upon the death of the insured, the death benefit will be paid directly to the new owner of the policy.