What selling a life insurance policy means and who can do it

Selling a life insurance policy — called a life settlement — means transferring ownership of your policy to a third party in exchange for a lump sum of cash. The buyer takes over all future premium payments and becomes the beneficiary when you die. You walk away with money now instead of letting the policy lapse or cashing it in with your insurance company.

Not every policy can be sold this way. You must own the policy outright (not have it assigned to a lender or employer), and most buyers want policies with a death benefit of at least $100,000. Term life policies are rarely bought because they expire; permanent policies like whole life or universal life are the standard market. Your age and health also matter — buyers are more interested in policies held by older people or those with serious health conditions, because the death benefit will likely be paid out sooner.

You do not need permission from your insurance company to sell, but you do need to notify them after the sale closes. The new owner will handle that part of the paperwork.

Key Takeaways

  • A life settlement pays you a percentage of your policy's death benefit now, typically 10 to 50 percent depending on your age and health.
  • You must own the policy outright, and most buyers want death benefits of $100,000 or more on permanent policies like whole life.
  • The process involves getting your medical records reviewed, receiving offers from multiple buyers, and choosing the highest bid — it usually takes 30 to 90 days.
  • You lose all death benefit protection once the policy is sold, so the money goes to the buyer's beneficiary, not your family.
  • Brokers who arrange life settlements charge a commission (typically 10 percent of the sale price), and you may owe income tax on the portion of proceeds that exceeds what you paid in premiums.

How much money you can expect

The cash offer depends on how soon the buyer expects to receive the death benefit. If you are older or have a serious health condition, the payout will be higher — sometimes 40 to 50 percent of the death benefit. If you are younger and in good health, expect 10 to 25 percent. A 75-year-old with a $250,000 policy might receive $75,000 to $125,000; a 55-year-old with the same policy might receive $15,000 to $50,000.

The offer also reflects your policy's cash surrender value — what your insurance company would pay if you cashed it in directly. A life settlement broker will pull this number from your policy documents. If your cash surrender value is $30,000 and a buyer offers $40,000, you come out ahead by $10,000 compared to surrendering to the insurer.

Multiple buyers will bid on your policy once it is listed. You are not locked into the first offer. A broker shops your policy to several settlement companies and presents you with competing bids so you can choose the highest one.

The step-by-step process for selling

Start by contacting a life settlement broker — a licensed intermediary who connects sellers with buyers. You can search for brokers through the Life Insurance Settlement Association (LISA) website or ask your insurance agent for referrals. The broker does not charge you upfront; they earn a commission from the buyer if a sale closes.

Next, gather your policy documents. The broker will need your current policy, a recent statement showing the death benefit and cash surrender value, and your medical records. You may need to sign a release form so the broker can request records from your doctor. Some buyers also require a phone interview or brief medical exam.

Once the broker has your information, they send it to multiple settlement companies. Each company makes an offer based on your age, health, policy type, and death benefit. This stage typically takes two to four weeks. You will receive written offers and can ask the broker to explain the differences between them.

When you accept an offer, the buyer's legal team prepares the assignment documents. You sign these to transfer ownership of the policy to the buyer. The buyer then pays you the agreed amount, usually within 30 to 60 days after you sign. After payment clears, the new owner notifies your insurance company of the ownership change.

Costs and tax consequences you need to know

The broker's commission is typically 10 percent of the sale price and is deducted from your proceeds. So if you sell for $50,000, you receive $45,000 and the broker gets $5,000. Some brokers charge a flat fee instead; ask upfront which model they use.

You may also owe income tax on part of the sale proceeds. The IRS taxes the amount you receive above what you paid in premiums over the life of the policy. If you paid $20,000 in premiums and sold for $50,000, you owe income tax on $30,000 of gain. The buyer's company will send you a 1099-B form at tax time showing the proceeds. Consult a tax professional before you sell so you understand your tax bill.

There are no other standard costs, though some buyers may require an independent medical exam at their expense. Never pay an upfront fee to a broker or buyer — that is a sign of fraud.

Alternatives to selling if you need cash now

Before you sell, consider whether another option fits your situation better. If you own a permanent policy with cash value, you can surrender it to your insurance company for its cash surrender value. This is simpler than a life settlement and takes days instead of months, but the payout is usually lower than what a settlement buyer would offer.

You can also take a policy loan against the cash value of a whole life or universal life policy. You borrow against your own money, pay interest (usually 4 to 8 percent), and keep the policy in force. If you die before repaying the loan, the insurance company deducts the balance from the death benefit paid to your beneficiary. This option preserves some death benefit protection for your family.

If you simply cannot afford premiums anymore, you can let the policy lapse — stop paying and let it expire. You receive nothing, but you also have no further obligation. Some policies have a non-forfeiture option that converts remaining cash value into a smaller paid-up policy with no premiums due. Check your policy documents or call your insurer to see what options are available.

Red flags and how to avoid settlement fraud

Life settlement fraud is rare but does happen. Watch for these warning signs: a broker or buyer who pressures you to decide quickly, who asks for payment upfront, who guarantees a specific offer amount before your medical records are reviewed, or who claims to be affiliated with your insurance company or a government agency.

Legitimate brokers are licensed in your state and can provide references from past clients. Ask for their license number and verify it with your state's insurance department. Get everything in writing — the offer amount, the timeline, the commission, and what happens if the deal falls through.

Never sign documents you do not understand. If the language is confusing, ask the broker to explain it in plain terms or hire an attorney to review before you sign. The cost of a lawyer ($500 to $1,500) is worth it if you are selling a large policy.

What happens to your family after you sell

Once you sell your policy, your family loses the death benefit protection. The money goes to the new owner's beneficiary, not to your heirs. This is the biggest trade-off of a life settlement — you get cash now, but your dependents lose the financial safety net the policy provided.

Before you sell, think about whether your family relies on that death benefit. If you have dependents, significant debt, or a mortgage, selling may leave them vulnerable. If you are retired, have no dependents, and the policy is costing you money you cannot afford, a settlement may make sense.

Some people sell part of a policy's value through a fractional settlement, keeping some death benefit in place. Not all buyers offer this, but it is worth asking about if protecting your family is a concern.

Frequently Asked Questions

Can I sell a term life policy?

Rarely. Term policies expire after a set number of years and have no cash value, so buyers have little interest in them. A few specialized settlement companies buy term policies from people with serious health conditions who are expected to die before the term ends, but offers are uncommon and very low. Permanent policies like whole life or universal life are the standard market.

What if I still owe money on a loan against my policy?

The buyer will require that any outstanding policy loans be repaid before the sale closes. The proceeds from your settlement will cover this, but it reduces the amount of cash you take home. Disclose any loans to the broker upfront so they can factor this into the offers they shop.

Can I change my mind after I sign the assignment?

Once you sign the assignment documents and the buyer's payment clears, the sale is final. You cannot undo it. Some states allow a brief rescission period (usually 10 to 14 days) where you can cancel and return the money, but this varies by state and by buyer. Ask about this before you sign.

Do I have to tell my family I sold the policy?

You are not legally required to, but you should. Your family may be counting on that death benefit. If they discover after your death that the policy was sold, it can create conflict and financial hardship. Transparency now prevents problems later.

What if my health gets worse after I sell?

That does not affect you — the buyer now owns the policy and bears the risk. If you develop a serious illness after the sale closes, the buyer benefits because the death benefit will be paid sooner. This is one reason buyers are willing to pay more for policies held by older people or those with existing health conditions.