How to Sell Your Life Insurance Policy

Life insurance policies can be sold. As circumstances change, policyholders may find their coverage no longer aligns with financial needs. Instead of letting a policy lapse or surrendering it for less value, selling it to a third party can provide a lump sum. This process involves transferring policy ownership for an immediate cash payment, offering an alternative way to extract value.

Understanding Policy Sale Options

The secondary market offers two main ways to sell policies: life settlements and viatical settlements. A life settlement involves selling a policy to a third party for a cash sum greater than its cash surrender value but less than its full death benefit. This option is typically for individuals, often aged 65 or older, who no longer need their policy or find premiums burdensome.

Both involve selling a policy, but the key difference is the insured’s health and life expectancy, which impacts payout and tax treatment. Viatical settlements often yield a higher percentage of the policy’s death benefit due to the shorter time until the benefit is paid.

Most permanent life insurance policies (e.g., whole life, universal life, and convertible term) are generally eligible for sale. These policies often accumulate cash value, a factor in determining eligibility and sale value. Policies with a death benefit of $100,000 or more are typically considered, though some buyers may consider lower face values. Pure term life insurance policies without a conversion option are usually not eligible unless the insured is terminally or chronically ill, qualifying as a viatical settlement. Buyers are typically licensed life settlement providers, including institutional investors or firms specializing in acquiring such assets.

The Sale Process

Selling a policy begins by contacting a life settlement broker or provider. The initial step involves gathering policy documents, including the policy number, face amount, cash value, and premium payment schedule. This information helps determine preliminary eligibility.

Next, the policyholder provides personal and medical information, requiring medical record release and a health questionnaire. This allows buyers to assess the insured’s health and estimate life expectancy, a significant factor in pricing. A life settlement broker can solicit multiple offers from various licensed providers.

Once offers are received, the policyholder reviews them, with independent legal and financial advice, to understand the terms and conditions. The sale contract details the agreement, including the lump sum payment and transfer of policy ownership and beneficiary designation to the buyer. Upon offer acceptance, the final steps involve policy transfer and disbursement of the lump sum payment to the seller.

Factors Influencing Policy Value

The amount a policyholder receives when selling a policy is driven by several factors. The insured’s health and estimated life expectancy are the most significant determinants, directly impacting when the buyer receives the death benefit. A shorter life expectancy generally leads to a higher offer, as the buyer bears premium responsibilities for less time.

Policy characteristics also play a role in valuation. The policy’s face value, or death benefit, is a primary consideration; higher death benefits typically yield larger settlement amounts. The policy type (e.g., universal life or whole life) and cash surrender value, if applicable, also influence offers. The premium payment schedule affects the buyer’s future costs; lower ongoing premiums can make a policy more attractive.

Market conditions, including interest rates and institutional investor demand for life settlement assets, can impact offer competitiveness. Providers often discount the future death benefit based on these rates. Fees or commissions, particularly those paid to a life settlement broker (20% to 30% or more), will reduce the net proceeds.

Tax Implications of Selling a Policy

Proceeds from selling a policy through a life settlement may be subject to income tax. Tax treatment follows a three-tier structure based on the policy’s cost basis, cash surrender value, and sale proceeds. Generally, the portion of proceeds up to the premiums paid (cost basis) is a tax-free return of capital.

Any amount received above the cost basis but not exceeding the cash surrender value is taxed as ordinary income. Proceeds exceeding both the cost basis and cash surrender value are taxed as capital gains. For instance, if a policy was sold for $75,000, with $30,000 in premiums paid and a $40,000 cash surrender value, $30,000 would be tax-free, $10,000 ($40,000 CSV – $30,000 basis) would be ordinary income, and the remaining $35,000 ($75,000 sale price – $40,000 CSV) would be capital gains.

A distinction exists for viatical settlements, for terminally or chronically ill individuals. Under federal law, such as HIPAA, viatical settlement proceeds are tax-free if the insured meets specific criteria, like a life expectancy of 24 months or less certified by a physician. For chronically ill individuals, proceeds may also be tax-free if used for qualified long-term care expenses. These transactions are typically reported to the IRS, often on Form 1099-B. Given tax law complexities and individual circumstances, consulting a qualified tax advisor or financial planner is recommended before proceeding with a policy sale.