Life Settlements: How Selling a Life Insurance Policy Works

A life settlement is the sale of a life insurance policy you own to a third party. The buyer pays you a lump sum, takes over the premiums and becomes the beneficiary, so the buyer collects the death benefit when the insured person dies. The payout is typically more than the policy’s cash surrender value, which is what your insurer would pay if you cancelled, but less than the death benefit. Whether it makes sense depends on what you need the money for and what your beneficiaries would lose.

The short answer

A life settlement can be worth looking at if you have a policy you no longer need or can’t afford, and the alternatives, like letting it lapse or surrendering it, would leave you with little or nothing. It isn’t free money. You give up the death benefit, the payout can be taxed, fees can be significant, and not every policy qualifies.

How it works

1. You decide you may no longer need or be able to keep the policy. Compare your other options first. See what to do with a policy you can’t afford.
2. You gather information about the policy, such as the type, face value, cash value, premiums and any loans. Buyers also review the insured’s age and health, often through medical records.
3. You request offers, either through a broker, who may seek offers from several buyers, or directly from a provider.
4. You compare offers, ideally after fees and taxes.
5. You sign and transfer ownership. The insurer records the change of owner, and you’re paid. How the payment is handled should be spelled out before you sign.

Who typically qualifies

There are no universal rules. Each buyer sets its own, but these are common:

• Age. The insured is often 65 or older. A younger person with a significant health change may sometimes qualify.
• Policy size. Buyers often look for a death benefit of around $100,000 or more.
• Policy type. Universal life and whole life are common. Term policies may qualify in some cases, especially if they can be converted.
• How long the policy has been in force. Many buyers want it to have been in place for a minimum period, often two years.
• Health and life expectancy. These strongly affect how much a buyer will pay.

What a buyer will pay depends on the insured’s age and health, the type and size of the policy, the premiums that will need to be paid and the cash value.

A worked example

This is an illustration with made-up numbers, not a promise of any offer.

• Policy death benefit: $250,000
• Cash surrender value: $20,000
• Annual premium: $9,000

Your choices might look like this:

If a broker’s fee on the $70,000 offer were an example $10,500, you’d receive about $59,500 before any tax. You’d also stop paying premiums, but your beneficiaries would no longer receive the $250,000.

The right choice depends on whether anyone needs the death benefit, whether you can keep paying the premiums, and what you’d do with the money.

The risks

• You give up the death benefit. Your beneficiaries won’t receive it.
• Taxes. Part of the money may be taxable. See taxes on life settlements.
• Fees. Brokers and others may take a share of the offer. Ask for fees in dollars.
• Effect on benefits. A lump sum can affect eligibility for needs-based programs such as Medicaid or SSI. Ask before you sell.
• Privacy. Selling means sharing medical and financial information.
• Not everyone qualifies, and offers vary a lot. There’s no guaranteed amount.

Who it may suit

• Older policyholders who no longer need the coverage, or can’t keep paying the premiums.
• People for whom surrender or lapse would return little or nothing.
• People who have talked with their family, and a financial or tax advisor, about the trade-off.

Who should look at other options first

• People whose beneficiaries rely on the death benefit.
• People who can afford to keep the policy, or can lower the cost another way.
• People with an urgent need for money who haven’t compared alternatives, such as policy loans or riders.

This article is for general information and isn’t financial, tax or legal advice. Examples use made-up numbers. Rules vary by state. Check with a licensed professional about your situation.