Can I Sell My Life Insurance Policy? (2024 Guide)

Changes in your lifestyle and financial situation might warrant a potential sale of your life insurance policy. Here are a few common reasons to consider selling your policy:

• You can no longer afford the premiums after retirement or job loss.
• Other expenses have increased, leaving you with less disposable income.
• You need cash to cover a large, unexpected expense.
• You need to start saving for long-term care or medical bills.
• Estate taxes are no longer a concern.
• Your children and other dependents are now grown and financially independent.
• Your life insurance policy is nearing the end of its term.

Most of these reasons boil down to no longer needing, wanting or being able to afford the policy. Not only will you receive money from the sale, but you can also free up some room in your budget.

If you want to sell your life insurance policy, you can start by familiarizing yourself with life settlement transactions and associated regulations. Check with your state’s insurance authority for more information about the process, licensing requirements and potential scams.

Next, decide whether to use a broker. This choice involves a tradeoff between cost and convenience: A licensed life settlement broker can answer your questions, look out for your interests, pull quotes and handle negotiations — but a broker will charge for the service. Alternatively, you can choose to shop and compare on your own to avoid broker fees.

Regardless of whether you hire a professional, the process will require the same basic steps:

1. Application: You’ll complete an application for each life insurance settlement from which you solicit offers. As part of the application process, you must grant the settlement company permission to obtain information about your policy and health. You may also be given disclosures and asked to provide additional information or documentation.
2. Documentation: Once you have submitted your application and granted the necessary permissions, the settlement company underwriters will begin gathering information. They will contact your life insurance provider to request details about your policy, including its death benefit and premiums. The underwriters will also request a copy of your medical records from your healthcare providers.
3. Appraisal: After reviewing the relevant information, underwriters will determine the market value of your life insurance policy. The underwriters will consider whether your policy is a good investment based on its value and the opinion of medical experts regarding your health. They will also look for signs of fraud.
4. Offer: Assuming your policy is deemed suitable for purchase, the settlement company will extend an offer. You can either accept or decline the offer. We recommend comparing offers from multiple companies before making a final decision. If you hired a broker, you may be more able to negotiate.
5. Closing: If you accept the offer, the settlement provider will send a closing package for you to review and sign. Once you return the signed documents, your insurance provider will be notified of the transaction. Ownership of the policy will change, and you will receive the settlement funds.

From start to finish, you can expect this process to take between 60 and 120 days. The exact timing will depend on how quickly third parties — including your insurance company and health care providers — respond to requests for information.

Note that selling a life insurance policy requires the cooperation of the policy owner and the insured person. In most cases, the same person fills both roles — but not always. The policy owner grants access to policy information, while the insured person grants access to medical records.

It is impossible to predict exactly how much money you can make by selling your life insurance policy, as there is no standard formula or ratio. Every case is different, and the amounts different companies offer vary. However, according to the Life Insurance Settlement Association (LISA), the average life settlement is 20% of the policy’s face value. That means if your policy has a $100,000 benefit, you might receive $20,000 from selling it.

Life settlement companies base their offers on many of the same factors life insurance companies use to determine your premiums. However, factors that work against you when buying a policy often work in your favor when selling it. That’s because life insurance and life settlement companies have opposing interests. The former will pay the death benefit, while the latter hopes to receive it.

What Affects Your Payout?

How much money you can get for your life insurance policy depends primarily on four factors:

• Your age
• Your health
• Your policy’s premiums
• Your policy’s death benefit

After the sale, the life settlement company will take over paying your premiums in exchange for becoming the beneficiary of the policy. The lower the premiums and the less time you spent paying them, the more the company benefits.

Most life settlement companies look for policies worth at least $100,000 covering people aged 65 years and older. The older you are and the higher your death benefit, the higher the offer will be. If you have a health condition that reduces your life expectancy, the offer will be even higher. However, high premiums will negatively impact your offer.

We recommend gathering offers from at least three companies before selling your policy. You can only sell the policy once, so it’s worth taking time to compare quotes and find the best offer. A licensed life settlement broker can make this process easier by negotiating with companies on your behalf, though they will charge a fee or commission.

Be sure to consider the broader impact of selling your policy, too. You will lose access to the cash value of your policy, and your family will not receive the death benefit when you die. Further, the money you gain from the sale may be subject to taxes and debt collection. The extra income may disqualify you from receiving Medicaid and other financial assistance programs.

Tax Consequences of Selling Your Life Insurance Policy

When you sell a life insurance policy, a portion of the settlement may be considered taxable income. The taxed amount and tax rates will vary depending on the amount of the settlement, how much you paid in premiums and the cash value of the policy. If you sell your policy while terminally or chronically ill, the transaction may qualify as a tax-free viatical settlement. To learn the specific tax consequences of selling your policy, you should consult a tax professional.

RS Revenue Ruling 2009-13-15 provides guidance for policyholders who sell or surrender their life insurance policies, but the 2017 Tax Cuts and Jobs Act has simplified the rules. Under the new rules, the settlement is tax-free up to your cost basis — the total premiums you paid. After that, the proceeds are taxed as ordinary income up to the policy’s cash surrender value. The excess proceeds are then taxed as capital gains.

Not anyone can sell any life insurance policy for cash, but the requirements are fairly straightforward.

You can sell your policy to a third party if you are both the policy’s owner and the named insured. In other words, if you took out a policy on another person, such as your child, you may not be able to sell it.

Often, the policy must be individual life insurance, not group life insurance, and have a death benefit of at least $100,000 to be eligible for sale.

There may also be an age restriction on selling your life insurance policy. In most cases, you need to be aged 65 or older unless you can verify certain health issues to qualify for an exemption.

Even if your life insurance policy has become unnecessary or the premiums have become unaffordable, selling may not be the best or only solution. Depending on the situation, one of these alternatives might better serve your needs:

• Use the cash value of the policy: Whole and universal life insurance policies have both a face value and a cash value. Once that cash value reaches a certain threshold, you can withdraw from it or borrow against the policy. These actions will reduce your policy’s death benefit, though, unless you repay the money. Alternatively, you can use the excess cash value to cover your premium payments.

• Convert to a whole life insurance policy: Convertible term policies give policy owners the option to convert to whole life insurance, typically without needing a new medical exam. Though the premiums for whole life insurance will be higher than those for a term life insurance policy, they will remain constant for the rest of your life. Plus, your policy will accumulate a cash value that you can use during your lifetime.

• Seek an accelerated death benefit: Some policies include an accelerated death benefit provision. Under the terms of this provision, the life insurance company will prepay some or all of the death benefit if the insured is diagnosed with a terminal illness. The diagnoses that trigger this provision may vary from one company to another, but if you meet the eligibility requirements, you can use the funds to cover your medical expenses.

• Change the beneficiary: You can change the beneficiary of your term or permanent life insurance policy as needed. If none of your loved ones rely on your income, you might consider using your policy as a gift, legacy donation or charitable contribution. Rather than naming a relative, you could name a nonprofit, university or other organization as the beneficiary.

• Reduce the death benefit: One way to lower the cost of life insurance is to reduce the death benefit. If your policy has become unaffordable, ask your insurance agent if this is an option. The death benefit is the face value of the policy. The lower the value of your policy, the lower your insurance premiums will be.

• Replace your policy: If your existing life insurance policy no longer aligns with your financial goals, consider replacing it with a new one. For instance, you might replace a term life insurance policy with whole, universal or variable life insurance to take advantage of the cash value benefits.
• Surrender the policy: You are always free to surrender a life insurance policy you no longer want. Many permanent life insurance policies even have a cash surrender value. However, in most cases, selling your policy will net you more money than simply surrendering the policy. You can also stop making premiums payments and allow the policy to lapse, but this solution provides no cash payout.

We recommend speaking to a financial advisor or estate planning attorney before selling your policy. You might also benefit from a conversation with your insurance agent and your accountant. Get personalized advice from qualified professionals to ensure that you fully understand the legal and financial implications for both you and your heirs.

You can sell your life insurance policy, but whether you should is a complex question because of the potential legal and financial implications. Before deciding to sell, review the alternatives. In many cases, it can make more sense to adjust, convert or replace against your policy than to sell it. Some types of life insurance even allow you to withdraw from or borrow against the cash value of the policy tax-free.

That said, if the only viable options are to surrender your policy or let it lapse, you should sell your life insurance policy. LISA members offered, on average, 7.8 times more than the cash surrender value for policies they bought in 2021. Just remember that your life insurance settlement may not be tax-free income, and it may affect your eligibility for certain public assistance programs, such as Medicaid.

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