If you have a term life insurance policy you no longer want, you can sell it to a third-party through a process known as a life settlement. In this guide, we’ll discuss which term policies can be sold and how to determine a term policy’s value. Using this information, you can figure out how much your term policy is worth and if selling is a good choice.
What is a term life insurance policy?
Term life insurance provides coverage during a specified length of time and guarantees the payment of a death benefit during that period. The shortest term policy available is for one year, and you can typically buy policies with terms that last up to 30 years, or until you reach a specified age. Term life insurance is usually not available for any term that would end past the policyholder’s 80th birthday, according to the Insurance Information Institute.
What happens at the end of a term life insurance policy?
When a term life insurance policy expires, if you’re still around, there will be no payment to your beneficiaries. You have the option of either renewing the policy (as long as you are not past the age of eligibility), converting it to a permanent life insurance policy or letting it terminate.
Can you sell a term life insurance policy for cash?
You can sell a term life insurance policy for cash through a life settlement, but your policy will usually have much more value on the market if it is the type that can be converted to a whole or universal life policy. The provision in a term life policy that allows for this change is called a conversion rider. It typically will enforce a time limit for making the conversion – generally before your term policy expires – along with an age limit of 65 to 70 years.
If you purchase a convertible term policy, you can exercise your option to convert without the requirement of an additional medical exam to determine your health condition. The face value of your policy will typically stay the same when it’s switched, but your premiums will go up in light of the cash-building benefit of the new permanent policy.
You may also be able to sell non-convertible and non-renewable term policies, but will have to check with a life settlement company for eligibility.
Who buys term life insurance policies?
Life settlement companies and third-party investors buy term life policies from policyholders.
As a policyholder, you can sell your insurance directly to a buyer, called a life settlement provider. You can also use a life settlement broker or you can work with a full-service life settlement company.
- A life settlement provider buys converted term policies directly.
- A life settlement broker earns up to 30% commission on the sale price of a policy in return for marketing your policy to buyers.
- A life settlement company provides a full-service solution, managing the transaction from start to finish.
How much can you sell a term life insurance policy for?
The amount you get for your term policy is based on factors like your age, health status, and policy value. Additionally, you can typically get more money if you convert your term policy into a form of permanent life insurance such as whole or universal life. While there isn’t public information about the sale value from term policies, LISA’s 2023 Market Data Collection Survey reports the average life settlement value is $262,000 and people who sold received over $842 million from the sale of their policies.
How to sell a term life insurance policy
To sell a term life insurance policy through a life settlement, you’ll need to follow these steps:
- Determine if your policy is convertible: Since permanent insurance policies sell for more than term policies, your first step should be determining if your term policy can be converted into a permanent policy. You can review policy documents, contact your insurance carrier, or connect with a life settlement company to determine if your policy can be converted. Sometimes, term policies may have a rider that allows them to be converted, so be sure to review insurance documents carefully. Even if your term policy is non-convertible or non-renewable, you may be able to sell it through a life settlement.
- Contact a life settlement company: To sell your policy, you’ll need to work with a life settlement company like Harbor Life Settlements. A life settlement company will handle most of the work for you, starting with contacting your insurance carrier to get the necessary documents and requesting medical records (both done with your consent in writing, of course). Then, they will underwrite the policy sale and identify one or more institutional investors who may be interested in acquiring your specific policy. Some investors prefer large face amounts ($1 million and up), while others prefer small policies, and others don’t have a preference. Similarly, some investors prefer insureds with impaired health, while others favor healthy insureds. The life settlement company, who has access to a broad network of institutional investors, handles the heavy lifting on your behalf, and provides you with a fast, fair offer to purchase the policy for a lump sum cash payout.
- Sign paperwork to finalize the transaction: If you accept the offer to purchase your policy, you’ll need to sign paperwork to officially transfer ownership of the policy. Here again, your life settlement company will help you through this process and make it as simple as possible for you. Once everything has been signed, a lump cash sum will be deposited into your account and the buyer becomes the policy’s owner
Are there tax implications from selling a term life insurance policy?
Yes, you’ll have to pay income tax if the proceeds from selling your life insurance policy exceed the amount you’ve paid into the policy through premiums. For example, if you sell a term policy for $100,000 but have paid $60,000 in premiums during the time you’ve owned it — you’d have to pay income tax on the $40,000 difference in proceeds you receive. We recommend working with a tax consultant to figure out if you’d pay taxes from selling your term policy and how much you’d owe.
You may also have to pay fees during the life settlement transaction including administrative fees, underwriting costs, and commissions if you work with a life settlement broker.
Pros and cons of selling your term life insurance policy
Pros
Selling your life insurance policy can be a good move if your policy is no longer needed or affordable, and you need cash for your living expenses. You can use the money to boost your retirement savings, pay your medical bills or cover your long-term care costs.
If you’ve been diagnosed with a terminal or life-threatening illness, you have another option for getting cash from selling your life insurance called a viatical settlement. Unlike with traditional life settlements, there is no minimum age requirement for a viatical settlement.
Since policyholders get nothing if the policy isn’t renewed at the end of its period, selling it allows you to get something for it and recoup money paid towards premiums.
Cons
Selling your term policy for cash isn’t the best option in every situation. By selling your policy, beneficiaries won’t get a death benefit unless you leave them some of the proceeds. If you’re selling because you have long-term care needs, you may find it’s better to get an accelerated death benefit or long-term care policy rider that allows you to access some of the death benefit’s money to pay for care.
