You can sell your life insurance policy to a third party for cash through a process called a life settlement, or return it to the insurance company through a surrender.
A life settlement is a sale of your policy to an investor or settlement company. You receive a lump sum that is typically more than the cash surrender value but less than the death benefit. The buyer becomes the new owner, pays future premiums, and collects the death benefit when you pass away.
A surrender is returning the policy directly to your insurance company. You receive the cash surrender value — the amount your policy has accumulated minus any surrender charges and outstanding loans. This is simpler but usually pays less than a life settlement.
Life settlements are most common for people over 65 with policies worth $100,000 or more, though age and health requirements vary by buyer. Surrenders work for any policy at any time, but the payout is lower and the policy ends immediately.
Key Takeaways
- A life settlement sells your policy to a third party for cash, while a surrender returns it to the insurance company for its cash value.
- Life settlements typically pay 10 to 25 percent of the death benefit, depending on your age, health, and policy type.
- You will need medical records and a detailed policy statement to get an offer from a settlement company.
- Surrendering a policy ends it immediately and may trigger taxes on gains above what you paid in premiums.
- Some policies cannot be sold — term life, employer-sponsored group policies, and policies with restrictions typically have no settlement market.
When a life settlement makes sense
A life settlement works best when you no longer need the death benefit and the cash value is too low to justify keeping the policy. Common reasons include retirement (you no longer have dependents to protect), a change in financial circumstances, or the cost of premiums becoming a burden.
The older you are and the worse your health, the more a settlement company will pay, because the death benefit will likely be paid out sooner. A 75-year-old in declining health may receive 15 to 25 percent of the death benefit. A 65-year-old in good health might receive 5 to 15 percent. A 55-year-old will likely find no buyers at all.
Settlement companies also pay more for permanent policies (whole life, universal life) than for term policies, because term policies expire and have no value if you outlive them. If your policy is term and approaching its end date, a settlement is unlikely to be available.
How to get a life settlement offer
Contact a life settlement broker or company directly. Brokers work with multiple settlement companies and shop your policy around; companies buy policies directly. You can find brokers through the Life Insurance Settlement Association (LISA) or by searching online for "life settlement broker" in your state.
Provide the settlement company or broker with your policy details: the type of policy, the death benefit amount, your age, and your current health status. They will ask for a copy of your policy statement, which you can request from your insurance company by phone or online.
The settlement company will order a medical underwriting report, which includes a review of your medical records and sometimes a phone interview. This determines how long they expect you to live and how much they are willing to pay. The process typically takes 30 to 60 days from initial contact to an offer.
Once you receive an offer, you can accept it, negotiate, or shop with other companies. If you accept, the settlement company handles the paperwork to transfer ownership of the policy. You receive the cash, and the new owner takes over premium payments.
Taxes and financial consequences of selling
The proceeds from a life settlement may be taxable. If you receive more than the total premiums you paid into the policy, the difference is usually taxed as ordinary income. For example, if you paid $50,000 in premiums over 20 years and receive a $70,000 settlement, the $20,000 gain is taxable.
A surrender has similar tax treatment. The insurance company will send you a Form 1099-R showing the taxable gain. You report this on your tax return. Surrendering a policy with no gain (you received less than you paid in) has no tax consequence.
Selling or surrendering a policy also ends your death benefit. If anyone depends on that money — a spouse, children, or a business partner — you lose that protection. Make sure you do not need the coverage before you proceed.
When to surrender instead of settling
Surrender your policy if you cannot find a settlement buyer, if the settlement offer is very low, or if you want the process to end quickly. Surrendering takes days or weeks; a settlement takes months.
Surrender also makes sense if your policy has restrictions on sale. Some employer-sponsored group policies, policies issued before certain dates, or policies with specific contract language cannot be sold. Your insurance company can tell you whether your policy is transferable.
If you owe money against your policy (a policy loan), the insurance company will deduct that from your surrender value. Settlement companies will also factor this in, but they may be more flexible about repayment terms.
Policies that cannot be sold
Term life insurance has no settlement market in most cases. Term policies have no cash value and expire at a set age, so investors have no incentive to buy them. If you want to exit a term policy, surrender is your only option — and you will receive nothing, because term policies build no cash value.
Employer-sponsored group life insurance cannot be sold. When you leave the job, the policy ends or converts to an individual policy at your option. You cannot transfer it to a third party.
Some permanent policies have contractual restrictions that prevent sale. These are rare but do exist. Your insurance company's policy statement will note any restrictions. If you are unsure, ask your agent or call the company directly.
Frequently Asked Questions
What is the difference between a life settlement and a viatical settlement?
A viatical settlement is a life settlement for someone with a terminal illness or life expectancy of less than two years. The payout is typically higher because the death benefit will be paid sooner. The process and tax treatment are the same as a standard life settlement.
Can I sell my policy if I still owe money on it?
Yes. The settlement company will deduct any outstanding policy loans from the offer. If you owe $20,000 and receive a $70,000 offer, you receive $50,000 after the loan is repaid. The settlement company takes over the loan obligation.
Do I need a lawyer to sell my policy?
You do not need a lawyer, but some people hire one to review the settlement agreement before signing. The settlement company handles all paperwork to transfer ownership. If you have questions about the contract, an attorney can explain your rights.
What happens to my death benefit after I sell?
The new owner (the settlement company or investor) receives the full death benefit when you pass away. You no longer have any claim to it. This is why selling makes sense only if you no longer need that money to protect your family.
How long does it take to receive the money?
Once you sign the settlement agreement, the money is typically wired to you within one to two weeks. The entire process from first contact to receiving cash usually takes two to four months, depending on how quickly medical records are obtained.