How To Sell Term Life Insurance Successfully

Term life insurance is a type of insurance that provides coverage for a specific period, usually between 5 and 30 years. Unlike whole life insurance and other permanent policies, term life insurance does not have a cash value component, meaning it cannot be cashed out. However, it is possible to sell your term life insurance policy to a third party in a process known as a life settlement. This allows you to receive a lump sum payment while you are still alive, which can be useful if you need quick cash or no longer need the coverage.

How to sell your term life insurance policy

Selling your term life insurance policy is a big decision that should not be taken lightly. If you have a term life insurance policy that you no longer want or need, you can sell it to a third party through a process known as a life settlement. Here are the steps you can take to sell your term life insurance policy:

Find a reputable broker:

You will need to share personal information and documents regarding your policy with a broker. The broker will then assess whether it is feasible to sell your policy.

Determine if your policy is convertible:

Since permanent insurance policies generally sell for more than term policies, it is worth checking if your term policy can be converted into a permanent policy. You can review your policy documents, contact your insurance carrier, or connect with a life settlement company to determine if your policy can be converted. Even if your policy is non-convertible or non-renewable, you may still be able to sell it.

Contact a life settlement company:

A life settlement company will handle most of the work for you. They will contact your insurance carrier to obtain the necessary documents and request medical records (with your consent). They will then underwrite the policy sale and identify potential institutional investors interested in acquiring your specific policy.

Sign paperwork to finalize the transaction:

If you accept the offer to purchase your policy, you will need to sign the necessary paperwork to officially transfer ownership. The life settlement company will guide you through this process. Once everything is signed, a lump sum cash payment will be deposited into your account, and the buyer becomes the new policy owner.

Be aware of tax implications:

Selling your term life insurance policy may have tax implications. You will likely need to pay income tax if the proceeds from the sale exceed the amount you have paid into the policy through premiums. Consult a tax advisor or financial professional for personalized guidance.

Consider the pros and cons:

Selling your term life insurance policy can provide a lump sum of cash, potentially save you money on premiums, and relieve you of the responsibility of maintaining the policy. However, your family will no longer receive the death benefit, you may have to pay taxes on the proceeds, and it is a permanent decision that cannot be reversed.

Remember, it is important to understand the terms of the contract, shop around for different offers, and be certain that you no longer need or want the coverage before proceeding with the sale of your term life insurance policy.

Pros and cons of selling your term life insurance policy

Pros of Selling Your Term Life Insurance Policy:

• End premium payments: Life settlements relieve you from the obligation to pay expensive premiums.
• Get more cash than surrender value: Life settlements provide, on average, four times more money than the accumulated cash surrender value.
• Access to large amounts of cash: For those nearing or in retirement, a life insurance policy could represent an unexpected source of cash to supplement retirement income or pay down bills.
• Recoup money you've paid in: If you were to lapse a term policy, you'd get nothing back from all the money you've paid in over the years. A life settlement can help you get some of your investment back instead of allowing it all to go to the insurance company as profit.

Cons of Selling Your Term Life Insurance Policy:

• Potential tax liability: In most cases, you won't owe income taxes on life settlement proceeds unless the settlement is greater than the total amount you've paid into the policy over the years. However, it is recommended that you speak with your financial advisor before pursuing a life settlement.
• Ask about fees or commissions: If you work with a broker instead of going directly to a life settlement provider, the broker will take a commission.
• You may lose eligibility for financial assistance: If you currently receive Medicaid or other types of financial assistance programs, check with a financial advisor who understands eligibility rules before accepting a life settlement offer.
• Eliminates death benefits: Your beneficiaries will no longer receive the death benefit associated with the policy. However, if you elect to receive a partial cash payment in an alternative life settlement program, you could maintain coverage in addition to receiving a cash settlement.

What are the tax implications of selling your term life insurance policy?

Selling your term life insurance policy can have tax implications that significantly impact the financial outcome of the sale. Here are the key points to understand:

Taxable Gains

The sale of your term life insurance policy may generate taxable income in the form of gains. This taxable gain is generally the difference between the sale price and the premiums you've paid into the policy. This gain is typically subject to income tax, which can result in a notable tax liability.

Tax-Exempt Scenarios

Certain situations may offer tax exemptions when selling your term life insurance policy. For example, if you're terminally or chronically ill, a portion or all of the proceeds from the sale may be tax-free. Additionally, if the policy qualifies as a "viatical settlement" due to your life expectancy, it may also be exempt from taxes.

Impact of Policy Type and Ownership

The type of life insurance policy and its ownership can influence tax implications. Term life insurance policies often result in minimal tax consequences since they lack a cash value component. In contrast, permanent policies such as whole life, universal life, or variable life policies may have cash values, making them potentially 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 typically falls under capital gains tax rules. The gain can be categorized as 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 strategies to mitigate the tax implications of selling your term life insurance policy. One approach is a tax-deferred exchange, where you exchange your current policy for another investment property, potentially deferring the tax liability. Another option is to use the proceeds to purchase a new life insurance policy with a lower face value, reducing the taxable gain. Additionally, charitable donations of the policy can provide tax advantages.

Professional Guidance and Compliance

Given the complexity of tax implications, seeking professional guidance is highly recommended. Consulting financial advisors, tax experts, and legal professionals can help you navigate the intricacies of the sale, optimize financial outcomes, ensure compliance with tax laws, and identify the most advantageous strategies.

Who buys term life insurance policies?

Term life insurance policies are often purchased by investors, such as mutual fund companies, hedge funds, and private capital groups. These investors are usually looking to diversify their portfolios and view life insurance policies as an alternative investment to the stock market.

However, it is important to note that most investors will only consider purchasing a term policy if it is still convertible. The conversion privilege allows the policyholder to convert their term policy into a permanent policy, such as a universal or whole life policy, without undergoing additional underwriting. This means that the health rating from the original term policy will be carried over to the new permanent policy, which is more appealing to investors.

When selling a term life insurance policy, it is recommended to work with a life settlement broker. Brokers have a better understanding of the market and can help policyholders get the best offers for their policies by presenting them to a wide range of investors.

There are two main types of companies that purchase life insurance policies: life settlement companies and viatical settlement companies. Life settlement companies typically buy policies from seniors who no longer need life insurance, while viatical settlement companies work with individuals facing life-threatening illnesses.

Individuals may choose to sell their term life insurance policies for various reasons, including:

• High premium payments
• The desire to supplement retirement funds
• Medical expenses
• Policy being more extensive than necessary
• Needing to redirect finances due to unforeseen expenses

What are the alternatives to selling your term life insurance policy?

If you're looking for alternatives to selling your term life insurance policy, there are a few options to consider:

Accelerated Death Benefit Rider

If your policy includes an accelerated death benefit rider, this could be an alternative to a settlement. This rider allows you to receive cash advances against the death benefit of your life insurance policy if you have a terminal illness or meet other specific conditions.

Long-Term Care Rider

A long-term care rider is similar to an accelerated death benefit rider, as it allows you to access some of the death benefit while you're still alive. This money becomes accessible when a doctor determines that you require long-term care, and the death benefit is then decreased each month to cover the cost of care.

Adjust your coverage

If your premiums are no longer affordable, you could consider lowering your coverage level to reduce your premium payments. This option is worth exploring if you're struggling to make your payments but still want to maintain some level of coverage.

Convert to a permanent life insurance policy

You may have the option to convert your term life insurance policy to a permanent policy, such as whole life, universal life, or variable universal life insurance. Keep in mind that converting to a permanent policy will result in higher premium payments.

Surrender your policy for cash value

If you have a permanent life insurance policy with a cash value feature, you can choose to surrender your policy and receive the accumulated cash value. However, there may be surrender fees and potential tax implications associated with this option.

Borrow against the policy

If you need access to cash but want to keep your policy, you may be able to borrow against the accumulated cash value. However, the loan may accrue interest, and if it isn't repaid before your death, the outstanding amount will be deducted from the death benefit.

Use the cash value to pay premiums

If you're struggling to pay your premiums, you may be able to use the accumulated cash value to cover them. However, be sure to understand how this option affects your policy, as depleting the cash value could lead to a lapse in coverage.

Replace your policy with a different product

Insurance products and pricing change over time, so it's worth exploring whether there are more affordable or suitable options available that better meet your current needs.

Remember, it's important to carefully consider your options and seek professional advice before making any decisions regarding your life insurance policy.

Frequently asked questions