Who Can Sell Their Life Insurance?

Life insurance is a long-term financial commitment, but there may come a time when you can no longer afford the premiums or no longer need the coverage. If you're in this situation, you can sell your life insurance policy.

The process of selling your life insurance policy is known as a life settlement or viatical settlement. A life settlement is for healthy seniors, typically aged 65 or older, while a viatical settlement is for those with a terminal illness and a life expectancy of less than two years.

In a life settlement, you sell your insurance policy to a third-party buyer in exchange for a lump-sum cash payment. The buyer then takes over responsibility for paying the premiums on the policy and becomes the new beneficiary of the policy's payout. The payout is typically more than the policy's cash surrender value but less than the policy benefit.

In a viatical settlement, you work with a health-related policy sale company. The cash payout is tax-free and you can expect to receive between 40% and 70% of the policy's face value.

There are some drawbacks to selling your life insurance policy. For example, your beneficiaries will no longer receive a death benefit when you pass away, and you may have to pay taxes on the money you receive. It's important to carefully consider your options and consult a financial advisor before making any decisions.

Who can sell their life insurance policy?

A life insurance policy is your personal property, so you can sell it, but there are some eligibility criteria to meet. The right to sell your life insurance policy is legally protected by the Supreme Court case Grigsby v Russell (1911), where the court ruled it was legal for a patient to sell his policy to his doctor to pay for care.

To be eligible to sell your life insurance policy, you must be 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.

In most cases, you need to be aged 65 or older, but younger people may qualify if they have certain medical conditions. The policy must be individual life insurance, not group life insurance, and it usually needs to have been active for a set number of years—between two and five—before you can sell it.

The policy must also have a death benefit of at least $50,000 to $100,000. The older you are and the higher your death benefit, the more attractive your policy is to buyers.

If you have a term life policy, don't rule out the possibility of selling it. In some cases, term policies can be sold if they include a conversion feature that allows them to be converted to permanent coverage. Additionally, term policies may be marketable if the insured is terminally ill, as the policy's payout could be more immediate.

If you don't meet the above criteria, you may still be able to sell your policy through a viatical settlement if you have a terminal or chronic illness.

How much can you get for selling your life insurance policy?

The amount of money you can get for selling your life insurance policy depends on several factors, including your age, health, the type and value of your policy, and the insurer's financial stability.

According to the Life Insurance Settlement Association (LISA), the average life settlement is 20% of the policy's face value. For example, if your policy has a $100,000 benefit, you might receive $20,000 from selling it. However, this is just an average, and the actual amount you receive will depend on your specific circumstances.

Permanent policies, such as whole or universal life, usually offer higher payouts because they accumulate cash value over time. Term policies can be sold as well, but typically only if they are convertible to permanent coverage or if the insured's health has significantly declined.

The older you are and the more severe your health issues, the more attractive your policy is to buyers, as they expect to collect the death benefit sooner. Life settlement providers will also consider the premiums they will have to pay and the policy's cash value when determining their offer.

It's worth noting that there is no standard formula or ratio for calculating the value of your policy, and every case is different. It's recommended that you gather offers from multiple companies before selling your policy to ensure you get the best offer.

What are the pros and cons of selling your life insurance policy?

Selling your life insurance policy can be a good option if you need cash quickly, want to stop paying premiums, or no longer need the coverage. However, there are several pros and cons to consider before making a decision.

Pros:

• No more monthly premiums: When you sell your life insurance policy, the buyer takes over ownership, including the responsibility of paying premiums. This can be beneficial, especially as premiums usually increase with age.
• Higher payout than surrendering or lapsing: Life settlements often provide a significant payout that exceeds the cash surrender value. On average, life settlement proceeds are four times the cash surrender value.
• Use the proceeds for anything: With a life settlement, there are no restrictions on how you use the cash. You can put it towards retirement, healthcare costs, or even a memorable vacation.
• Alternative to surrendering or lapsing: If you are considering surrendering or letting your policy lapse, selling your life insurance can be a more lucrative option.

Cons:

• Tax implications: Life settlements may come with a tax bill, depending on your situation. While you won't be taxed on the entire cash payout, any profit you make from the settlement will typically be taxed as long-term capital gains.
• Reduced or no death benefit for beneficiaries: Selling your life insurance policy means that your beneficiaries will likely not receive a death benefit upon your passing. Instead, the life settlement company, as the new owner, will receive the payout.
• Difficulty finding a buyer: It can be challenging to find the right buyer for your specific policy, even with the help of a broker.
• Loss of coverage: Once you sell your policy, your coverage ends, and you will need to explore alternative options if you still require life insurance.
• Impact on public assistance eligibility: The money received from the sale could affect your eligibility for programs like Medicaid and other financial assistance.
• Broker fees and commissions: If you engage the services of a broker or settlement company, their fees and commissions can eat into a significant portion of the proceeds from the sale.

What are the alternatives to selling your life insurance policy?

If you no longer need your life insurance policy, there are several alternatives to selling it. Here are some options to consider:

Using the Cash Value of the Policy

If you have a whole or universal life insurance policy, you may be able to withdraw from or borrow against the policy's cash value. This can help cover premium payments or other expenses. However, doing so will reduce the policy's death benefit unless you repay the money.

Convert to a Whole Life Insurance Policy

If you have a convertible term policy, you may have the option to convert it to whole life insurance. This option typically does not require a new medical exam. While the premiums for whole life insurance are higher, they remain constant for the rest of your life, and the policy accumulates a cash value that can be used during your lifetime.

Seek an Accelerated Death Benefit

Some policies include an accelerated death benefit provision, which allows the life insurance company to prepay a portion or all of the death benefit if the insured is diagnosed with a terminal illness. The specific diagnoses that trigger this provision may vary by company.

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 could consider naming a nonprofit, university, or other organization as the beneficiary.

Reduce the Death Benefit

Reducing the death benefit is another way to lower the cost of life insurance. Contact your insurance agent to discuss this option and determine if it is a suitable choice for your situation.

Replace Your Policy

If your existing life insurance policy no longer aligns with your financial goals, consider replacing it with a new one that better suits your needs. For example, you could replace a term life insurance policy with whole, universal, or variable life insurance to take advantage of the cash value benefits.

Surrender the Policy

If you no longer want or need coverage, you can surrender your life insurance policy to the insurer in exchange for a lump sum payment. However, it's important to note that selling your policy will likely result in a higher payout compared to surrendering it.

Before making any decisions, it is recommended to consult with a financial advisor or estate planning attorney to fully understand the legal and financial implications of each option.

What are the tax consequences of selling your life insurance policy?

Selling your life insurance policy can have several tax consequences, and it is recommended that you consult a tax professional for specific advice.

Taxable Gains

When you sell your life insurance policy, you may generate taxable income in the form of gains. This gain is generally calculated as the difference between the policy's sale price and the premiums you've paid into the policy. This gain is then subject to income tax, which could result in a significant tax liability.

Tax-Exempt Scenarios

There are some scenarios where tax exemptions may apply when selling a life insurance policy. For example, if you are terminally or chronically ill, a portion or all of the proceeds from the sale might be tax-free. Additionally, if the policy qualifies as a "viatical settlement" due to your life expectancy, it may also be exempt from tax.

Impact of Policy Type and Ownership

The type of life insurance policy and its ownership can also influence the tax implications. Selling a term life insurance policy often results in minimal tax consequences since it lacks a cash value component. On the other hand, permanent policies such as whole life, universal life, or variable life policies may have cash values, potentially making them subject to taxation upon sale. Policies owned by individuals are also treated differently from those owned by trusts or corporations.

Capital Gains and Reporting

The sale of a life insurance policy is typically taxed as a capital gains tax. The gain is categorised as either ordinary income or capital gain, depending on factors such as policy type, ownership, and duration of ownership. Accurate reporting of the sale is essential to avoid potential penalties. Form 1099-R and Form 1040 Schedule D are commonly used for reporting such transactions.

Mitigation Strategies

There are several strategies that can help mitigate the tax implications of selling a life insurance policy, such as a tax-deferred exchange or utilising the proceeds to purchase a new life insurance policy with a lower face value. Charitable donations of the policy can also provide tax advantages.

Frequently asked questions