Yes, you can sell a term life insurance policy, but the process and your options depend on how much time is left on the policy and what the policy is worth to a buyer

Selling a life insurance policy is called a life settlement or viatical settlement (if you have a terminal illness). A licensed buyer purchases your policy, takes over the premium payments, and becomes the beneficiary. You receive a lump sum that is typically less than the death benefit but more than the cash surrender value — the amount your insurance company would pay if you simply cancelled the policy.

The catch: term life policies are harder to sell than permanent policies like whole life or universal life. Most buyers want policies with cash value or policies on people over 65, because those are more predictable to value. A 10-year term policy with 2 years left is nearly impossible to sell. A 20-year term policy on a 70-year-old with a $500,000 death benefit is more attractive to a buyer.

You do not have to sell through your insurance company. You work with a licensed life settlement broker or company, which finds buyers and handles the transaction. The broker takes a commission, usually 10 to 15 percent of the sale price.

Key Takeaways

  • Term life policies can be sold to a third party, but buyers are most interested in policies with significant time remaining and high death benefits on older policyholders.
  • The sale price (called the settlement offer) falls between what you would get if you cancelled the policy and the full death benefit.
  • You must work with a licensed life settlement broker; your insurance company does not handle these sales directly.
  • Selling your policy has tax consequences and may affect your Medicaid or other benefits, so you should consult a tax professional or elder law attorney before proceeding.
  • The buyer becomes the new owner and beneficiary, so your family will not receive the death benefit when you die.

Which term policies are worth selling

A life settlement only makes financial sense if the settlement offer is higher than the cash surrender value. For most term policies, that threshold is difficult to reach. Term policies have no cash value — you pay premiums and get coverage, nothing more. When you cancel, you get nothing back.

Buyers will consider your term policy if you meet certain conditions: you are typically 65 or older, the policy has at least 10 to 15 years remaining (though some brokers work with shorter terms), the death benefit is at least $100,000, and you are in average to good health. A policy on a 75-year-old with a $500,000 death benefit and 10 years left is a real asset to a buyer. A policy on a 55-year-old with 3 years left is not.

If your term policy is convertible — meaning you can convert it to permanent coverage without a medical exam — that feature adds value. Buyers see conversion rights as a way to extend the policy's life if you die later than expected.

How the settlement offer is calculated

A life settlement broker will order a medical underwriting report on you, similar to what your original insurance company did. The broker then shops your policy to multiple buyers. Each buyer makes an offer based on how long they think you will live, the death benefit amount, and current interest rates.

The settlement offer is never a fixed percentage of the death benefit. It depends entirely on the buyer's assessment of risk. A 70-year-old in excellent health with a $1 million policy might receive 60 to 80 percent of the death benefit. A 78-year-old with health problems might receive 40 to 50 percent. These are rough ranges; actual offers vary widely.

You are not obligated to accept the first offer. A broker's job is to solicit multiple bids and present them to you. You can reject all offers and keep the policy, or accept one and complete the sale.

Tax and benefit consequences of selling

The money you receive from a life settlement is taxable income to the extent it exceeds what you have paid in premiums. If you paid $50,000 in premiums over the years and receive a $120,000 settlement offer, you owe income tax on $70,000. This is not a capital gain; it is ordinary income. You will receive a Form 1099-B from the settlement company.

Selling a policy can also affect your Medicaid coverage. In most states, the lump sum counts as an asset, and if it pushes you over your state's asset limit, you may lose Medicaid temporarily until you spend down the money. Some states have look-back periods that examine your assets over the previous five years, so a large settlement could trigger a penalty period if you later need long-term care coverage.

If you receive Social Security benefits, the settlement money does not directly affect your payments — Social Security is not means-tested. However, if the settlement pushes your total income above certain thresholds, it could trigger taxation of your Social Security benefits.

The underwriting and approval process

Once you decide to move forward, the broker will order medical records from your doctors and may require you to undergo a medical exam. This process typically takes 4 to 8 weeks. The buyer uses this information to finalize their offer.

You will need to sign documents transferring ownership of the policy to the buyer. Your insurance company must be notified of the change of ownership. After the transfer is complete, the new owner pays all future premiums and receives the death benefit when you die.

Some states require a waiting period or additional disclosures before a life settlement can close. Florida, for example, requires a 15-day waiting period after you sign the settlement agreement. Check your state's insurance department website to see if your state has specific rules.

Alternatives to selling your policy

If a settlement offer is too low, you have other options. You can keep paying premiums and keep the coverage. You can surrender the policy to your insurance company for its cash value (usually zero for term policies). If your term policy is convertible, you can convert it to permanent coverage, which then has cash value and becomes more attractive to a future buyer.

Some insurance companies offer accelerated death benefits or living benefits riders that let you access part of the death benefit while alive if you are terminally ill or in a nursing home. Check your policy documents or call your insurance company to see if this option is available.

If you no longer need the coverage, you can simply let the policy lapse by stopping premium payments. This avoids the complexity and tax consequences of a settlement, though you lose the death benefit protection.

Finding a licensed life settlement broker

Not all states regulate life settlement brokers the same way. Some states require licensing and bonding; others have minimal oversight. Before working with a broker, verify that they are licensed in your state by checking your state insurance department's website.

Ask the broker for references from other policyholders and request a written explanation of all fees before you commit. Legitimate brokers are transparent about commissions and do not pressure you to sell quickly.

The National Association of Insurance Commissioners (NAIC) and the Life Insurance Settlement Association (LISA) both maintain directories of brokers, though listing does not may provide quality. Use these as a starting point, then verify licensing independently.

Frequently Asked Questions

Will my family still get the death benefit if I sell my policy?

No. When you sell the policy, the buyer becomes the new owner and beneficiary. Your family receives nothing when you die. This is why selling is usually considered only when you no longer need the coverage for your family's protection.

Can I sell a term policy with only a few years left?

It is very difficult. Most buyers want at least 10 to 15 years remaining. A policy with 2 or 3 years left has almost no resale value because the buyer's window to collect the death benefit is too short. You may be better off keeping the policy or letting it lapse.

What if I am in poor health — does that help or hurt the sale?

Poor health typically increases the settlement offer because the buyer expects to collect the death benefit sooner. However, if your health is so poor that you are unlikely to live long enough for the buyer to recoup their investment, they may not make an offer at all.

Do I have to disclose the sale to my insurance company?

Yes. The settlement broker handles this notification as part of the transfer process. Your insurance company must approve the change of ownership. Failing to disclose the sale could invalidate the policy.

Is the settlement money taxed as income or capital gains?

It is taxed as ordinary income to the extent it exceeds your total premiums paid. You will receive a Form 1099-B showing the taxable amount. Consult a tax professional to understand how this affects your specific tax situation.