You can sell an active life insurance policy to a third party through a life settlement or viatical settlement, receiving a lump sum that is typically less than the death benefit but more than the cash surrender value.

A life settlement is a transaction where you sell your life insurance policy to an investment company or individual buyer. The buyer becomes the new policyholder, pays all future premiums, and receives the death benefit when you pass away. You walk away with cash immediately — usually 10 to 25 percent of the death benefit, though the exact amount depends on your age, health, policy type, and current market conditions.

A viatical settlement is similar but designed specifically for people with a terminal or serious illness diagnosed to have a life expectancy of two years or less. Viatical settlements typically pay a higher percentage of the death benefit because the timeline to payout is shorter.

This is different from surrendering the policy to your insurance company, which pays only the cash surrender value (often much lower) and ends your coverage entirely. Selling to a third party puts more money in your pocket and may preserve some death benefit for your beneficiaries, depending on the offer.

Key Takeaways

  • Life settlements and viatical settlements are legal ways to convert an active policy into cash without surrendering it to the insurer.
  • You typically receive 10 to 25 percent of the death benefit for a life settlement, or higher for a viatical settlement if you have a terminal diagnosis.
  • The buyer assumes all future premium payments and receives the full death benefit when you die.
  • You will need medical underwriting, a copy of your policy, and proof of insurability; the process usually takes 30 to 90 days.
  • Life settlements have tax consequences and may affect your Medicaid or SSI benefits, so consult a tax professional and elder law attorney before proceeding.

Who can buy your policy and how the transaction works

Life settlement companies, hedge funds, and individual investors purchase policies from people who no longer need or want them. These buyers are betting that you will live longer than the policy's break-even point — the point at which the premiums they pay equal the death benefit they will eventually collect.

Once you accept an offer, the buyer pays you the agreed amount. You sign over ownership of the policy (called assignment), and the buyer becomes the new policyholder. They pay all premiums going forward. When you die, the death benefit goes to the buyer, not to your beneficiaries — this is why selling a policy is a major decision if you have dependents who rely on that benefit.

The entire transaction is handled through a broker or settlement company. You do not negotiate directly with the end buyer. The broker collects offers from multiple buyers, presents them to you, and handles the paperwork and fund transfer.

What you need to sell a policy

You will need an active life insurance policy with a death benefit of at least $100,000 (most buyers set this minimum). Term policies can be sold, but permanent policies (whole life, universal life, variable universal life) are more attractive to buyers because they have a cash value and no expiration date.

You must be the policy owner — if someone else owns it, they must consent to the sale. You will need a copy of your current policy document, including the death benefit amount, premium, and any riders. The buyer will also order a medical underwriting report, which includes a review of your medical history and may require a phone interview or in-person exam.

Some settlement companies require that you have owned the policy for at least two years (this is called the "insurable interest" rule in many states and prevents people from buying policies on strangers and then profiting from their death). A few states have a three-year requirement.

How much you will receive

The offer depends on several factors: your current age and health status, the policy's death benefit and annual premium, how long the buyer expects you to live, and current market demand for policies like yours. A 75-year-old in poor health with a $500,000 policy and a $5,000 annual premium might receive 20 to 25 percent of the death benefit. A 60-year-old in good health with the same policy might receive only 10 to 15 percent, because the buyer expects to pay premiums for many more years.

You will typically receive multiple offers from different buyers. The settlement company presents these to you, and you choose which offer to accept — or reject all of them if none meet your needs. There is no obligation to sell once you request quotes.

The cash you receive is not tax-free. The IRS taxes the difference between what you receive and your cost basis in the policy (the premiums you paid). Consult a tax professional before accepting an offer to understand your tax liability.

Timeline and steps to sell

The process typically takes 30 to 90 days from start to finish. First, you contact a life settlement broker or company and provide basic information about your policy. They request your policy documents and order a medical underwriting report. This stage takes one to two weeks.

Next, the broker presents offers from multiple buyers. You review the offers and choose one to accept, or request more information. This stage takes one to two weeks. Once you accept an offer, you sign assignment paperwork and other legal documents. The buyer's attorney reviews the policy to confirm it is valid and that you own it. This stage takes two to four weeks.

Finally, funds are transferred to you, usually by wire or check. The buyer pays all future premiums directly to the insurance company. The entire transaction is complete once the insurance company confirms the policy ownership change in their records.

Tax and benefit consequences you should know

The proceeds from a life settlement are taxable income to the extent they exceed your cost basis. If you paid $50,000 in premiums over the years and receive $100,000 from the sale, you owe income tax on $50,000. The settlement company will issue a 1099-R form for tax reporting.

If you receive Medicaid or Supplemental Security Income (SSI), the lump sum payment may disqualify you temporarily or permanently. Medicaid has asset limits, and a large cash payment could push you over the threshold. Some states allow you to spend down the proceeds on certain expenses (medical care, home modifications, funeral planning) without losing benefits. Consult an elder law attorney in your state before selling if you receive means-tested benefits.

Life insurance death benefits are normally not subject to income tax when paid to beneficiaries. Once you sell the policy, this protection is gone — the buyer receives the benefit tax-free, but you have already received your payment and owe taxes on it.

Alternatives to selling your policy

If you no longer need the death benefit, you can surrender the policy to your insurance company and receive the cash surrender value. This is usually lower than a life settlement offer, but it is simpler and faster — no medical underwriting, no broker fees, no tax complications beyond the gain on the cash value.

If you need cash but want to keep some death benefit in place, you can take a policy loan against the cash value. You do not have to repay it, but any unpaid balance is deducted from the death benefit when you die. This option is available only for permanent policies with cash value.

You can also reduce the death benefit (called a partial surrender) and receive a portion of the cash value while keeping the policy in force at a lower level. This preserves some benefit for your beneficiaries while giving you access to cash.

Frequently Asked Questions

Can I sell a term life insurance policy?

Yes, term policies can be sold, but they are less attractive to buyers because they have no cash value and will expire at a set age. You will typically receive a lower offer for a term policy than for a comparable permanent policy. The older the term policy and the closer it is to expiration, the lower the offer will be.

What happens to my beneficiaries if I sell the policy?

Once you sell the policy, your beneficiaries have no claim to the death benefit. The buyer receives the full amount when you die. This is why selling is a major decision if you have dependents who rely on that benefit. Some people sell only a portion of the death benefit or explore other options like policy loans.

Do I need a lawyer to sell my policy?

You do not need your own lawyer, but the buyer's attorney will review the policy and the transaction. If you have concerns about the legal terms or tax consequences, consulting an elder law attorney or tax professional before signing is wise. The cost is usually $500 to $1,500 and can prevent costly mistakes.

Can I sell a policy if I have a mortgage or outstanding loans against it?

Yes, but the lender may have a claim on the proceeds. If you took out a loan against the policy's cash value, the lender must be paid from the settlement proceeds before you receive your payment. Review your loan documents and contact your lender before selling to understand how much of the offer will go to them.

How do I find a reputable life settlement broker?

Contact the Life Insurance Settlement Association (LISA) or your state's insurance commissioner's office for a list of licensed brokers. Avoid any broker who guarantees a specific offer or promises a certain amount — offers vary based on your health and the market. Get quotes from at least three brokers before deciding.