How to Sell Your Term Life Insurance Policy

Selling a term life insurance policy offers a financial option for individuals whose needs or circumstances have changed. A life insurance policy, even a term policy, can be converted into cash during the policyholder’s lifetime. This process, known as a life settlement, allows policy owners to access their policy’s value instead of letting it lapse or surrendering it for a minimal amount.

Understanding Life Settlements

A life settlement involves selling an existing life insurance policy to a third-party buyer for a cash sum. This payment is typically greater than the policy’s cash surrender value, if any, but less than the full death benefit. The buyer assumes responsibility for all future premium payments and receives the death benefit when the insured passes away. This strategy provides policyholders an alternative to lapsing or surrendering a policy they no longer need or can afford.

Term life insurance policies can qualify for a life settlement, particularly if they are convertible to a permanent policy. While permanent policies are commonly sold, a convertible term policy allows the buyer to convert it to a permanent policy to maintain its value. Policyholders considering a life settlement are generally aged 65 or older, as a shorter life expectancy makes the policy more appealing to investors.

Younger policyholders might also qualify if they have a serious health condition that significantly reduces their life expectancy. Conditions such as cancer, heart disease, or other chronic illnesses can increase eligibility and the potential value of the settlement. Policies typically need a death benefit of at least $100,000 to $200,000 and should have been in force for at least two years.

Gathering Required Information

Initiating the sale of a term life insurance policy through a life settlement requires collecting specific documents. The original policy document, including any riders or conversion options, is necessary for a complete overview. Contact information for the insurance carrier is also important for verifying policy details and facilitating ownership transfer.

Comprehensive medical records are a central component. Buyers require detailed medical history, including physician statements, hospital records, and medication history, typically for the last three to five years. This information helps prospective buyers and brokers accurately assess the policyholder’s health status and estimate life expectancy, directly influencing the policy’s valuation.

Personal identification documents, such as a driver’s license or state ID, are needed to confirm identity. Any existing financial statements related to the policy, such as premium payment history, should be gathered. These documents provide clarity on the policy’s financial standing and the policyholder’s investment in the contract over time. Policyholders can typically obtain medical records from their doctors or healthcare providers and policy details directly from their insurance carrier.

Navigating the Sale Process

Once all necessary information and documents are gathered, the sale process begins. Policyholders submit their information to life settlement brokers or providers. Brokers act as intermediaries, presenting the policy to multiple licensed buyers to secure the most favorable offers.

Upon submission, the prospective buyer conducts a thorough medical underwriting review. This involves evaluating submitted medical records to determine the insured’s life expectancy, a significant factor in the policy’s valuation. Buyers also consider the policy’s death benefit and the cost of future premiums when formulating their offers.

Policyholders then receive and evaluate various offers from interested buyers. This stage often involves negotiation, where the broker advocates on behalf of the policyholder to maximize the settlement amount. If an offer is accepted, closing procedures begin, including the legal transfer of policy ownership and beneficiary designation to the buyer.

A purchase agreement, along with other required forms, is executed to finalize the transaction, adhering to state regulations. The agreed-upon lump sum payment is then typically placed into an escrow account. Funds are disbursed to the policyholder once the transfer of ownership is fully complete and verified by the insurance company.

Tax Implications of Selling

The proceeds received from a life settlement are subject to specific tax implications, primarily governed by the Tax Cuts and Jobs Act of 2017 (TCJA). The gain from the sale of a life insurance policy is generally taxable. Taxation is typically structured in three tiers based on the policy’s cost basis and, if applicable, its cash surrender value.

First, the portion of the settlement proceeds up to the policyholder’s cost basis is generally received tax-free. The cost basis represents the cumulative amount of premiums paid into the policy by the policyholder. This initial amount is considered a return of the policyholder’s investment and is therefore not subject to taxation.

For a term life insurance policy, which typically does not accumulate cash surrender value, any proceeds received above the cost basis are generally taxed as long-term capital gains. This differs from permanent policies where an amount up to the cash surrender value might be taxed as ordinary income before capital gains apply. The TCJA simplified previous guidance, making the calculation of basis more straightforward by not requiring a reduction for the cost of insurance charges.

Due to the complexities involved in calculating cost basis and determining the specific tax treatment, consulting with a qualified tax advisor is strongly recommended. A tax professional can provide personalized guidance based on individual financial circumstances and ensure compliance with current tax laws. This professional advice can help policyholders understand their potential tax liability and plan accordingly.