Life Settlements: Selling an Unneeded Policy

A life settlement is the sale of an existing life insurance policy to a third-party investor for a lump sum. Instead of surrendering the policy back to the insurer for its cash value - or letting it lapse - you sell it on the secondary market, where it is often worth more. The buyer pays the premiums from then on and collects the death benefit when the insured dies.

What qualifies

Life settlements are typically available to people aged 65 or older with a policy death benefit over $100,000. Policies with a large gap between the death benefit and the surrender value, and insureds whose health has declined since the policy was issued, command the highest offers. Term policies are sometimes eligible if they can be converted to permanent coverage.

Offer ≈ present value of the death benefit × likelihood of surviving each year − future premiums

Why it often beats surrendering

If a surrender value is low - because the policy is relatively new, or because it is a term policy - a life settlement can return several times as much. The comparison to make is not settlement versus death benefit, but settlement versus what the insurer would give you for the policy today.

The process and its risks

• You sign an agreement allowing an agent or broker to obtain your medical records.
• Providers bid for the policy; you choose whether to accept.
• You may remain responsible for premiums during the transfer period.
• Brokers typically charge a commission of around 3 to 6 percent.

Tax treatment

The amount you receive above your cost basis (premiums paid) is generally taxed as ordinary income up to the policy's death benefit, with any amount above that taxed as capital gains. Because the rules are subtle, this is one place a tax professional earns their fee.

Frequently asked questions

Do I need a terminal illness? No. Viatical settlements are for terminal cases; life settlements are for people with a normal or improved life expectancy who simply no longer need the policy.

Can I keep a partial interest? Some arrangements allow you to retain a portion of the death benefit.

Estimate your own settlement value with the calculator below.