How to Sell Your Life Insurance Policy

A life settlement offers individuals the opportunity to sell an existing life insurance policy to a third party. This transaction provides the policy owner with a lump-sum payment that is typically more than the policy’s cash surrender value but less than its net death benefit. This creates a regulated secondary market for policies that might otherwise lapse or be surrendered for minimal value. The buyer assumes responsibility for future premium payments and receives the full death benefit when the insured dies. This option can provide financial flexibility for various needs, such as covering medical expenses, paying off debt, or funding retirement.

Determining Eligibility and Policy Suitability

Deciding whether a life insurance policy is suitable for a life settlement involves evaluating individual circumstances and policy characteristics. Specific criteria must be met for a policy to be considered for sale. Understanding these requirements helps determine if this financial option aligns with one’s needs.

An individual’s age and health status are primary considerations for eligibility. Most life settlement providers consider policyholders 65 years or older as ideal candidates. This age threshold is preferred because older individuals generally have a shorter life expectancy, making the policy more attractive to investors. Younger policyholders may also qualify if they have a significant health condition that substantially reduces their life expectancy, such as a terminal diagnosis or serious health impairments. Life expectancy is a key factor, with a guideline of 15 years or less for a policy to be considered.

Beyond individual eligibility, the type and value of the life insurance policy itself play a role. Policies with a death benefit of at least $100,000 are required to generate interest from buyers. Most types of permanent life insurance policies are eligible for life settlements, including universal life, whole life, and variable universal life policies. These permanent policies offer guaranteed death benefits and potential for cash value growth.

Convertible term life policies may also qualify under specific circumstances, depending on the insured’s life expectancy versus the remaining premium schedule. Group policies or those with very small death benefits may not be suitable.

To assess eligibility, a policy owner will need to provide specific information and documentation. This includes details about the policy, such as its type, death benefit amount, cash value, and premium schedule. Medical history is essential, requiring the release of medical records to help determine the insured’s life expectancy. Personal identification documents are also necessary for the assessment process.

Navigating the Life Settlement Process

Once eligibility and policy suitability have been assessed, the process of selling a life insurance policy unfolds through several stages. This begins with identifying appropriate professionals to facilitate the transaction. Policy owners can work with licensed life settlement providers directly or engage a life settlement broker. Brokers represent the seller and can shop for offers from multiple providers, leading to more competitive bids.

After selecting a provider or broker, the formal application process commences. This involves submitting an application form along with authorizations for the release of medical records and policy information. The information provided is reviewed by the provider’s underwriting team. This underwriting process helps determine the insured’s life expectancy, which is a factor in assessing the policy’s value.

Based on this assessment, life settlement offers are generated. Policy owners may receive multiple offers, especially if working with a broker. Evaluate these offers, considering the lump-sum payment amount against the policy’s death benefit and any alternatives.

Upon accepting an offer, the transaction moves towards closing. This final stage involves signing legal documents that transfer policy ownership to the buyer. These documents include a purchase agreement, change of ownership forms, and change of beneficiary forms. An escrow agent holds the funds until all conditions are met and the ownership transfer is complete. Once ownership is transferred to the buyer, the agreed-upon lump-sum payment is released to the policy owner.

Understanding Financial and Tax Implications

The financial outcome of a life settlement is influenced by several factors. The amount received results from a detailed valuation process. Key determinants include the policy’s death benefit amount, premiums paid into the policy, and the insured’s life expectancy. Policies with higher death benefits command larger settlement offers, while a shorter life expectancy for the insured can lead to a higher payout as it reduces the period over which the buyer must pay premiums. Market conditions and the specific type of policy also contribute to the final offer.

The taxation of life settlement proceeds is an important consideration. The Internal Revenue Service (IRS) treats life settlement proceeds using a three-tiered approach, as clarified by IRS Revenue Rulings. The first portion of the proceeds, up to the policy’s “cost basis,” is received tax-free. The cost basis represents the total amount of premiums paid into the policy by the policyholder.

The second portion of the proceeds, which is the amount exceeding the cost basis but not more than the policy’s cash surrender value, is taxed as ordinary income. Finally, any amount received from the settlement that exceeds the policy’s cash surrender value is taxed as a capital gain. For term life insurance policies, where there is no cash surrender value, the entire settlement amount above the cost basis may be treated as a capital gain.

Life settlement providers are required to report the transaction to the policy owner and the IRS. This reporting is done on IRS Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions”. Consulting with a qualified tax professional is advisable for personalized guidance on the specific tax implications of a life settlement.