We all know you can borrow against your life insurance policy. But did you know you can sell your life insurance policy? Selling your life insurance policy in a life settlement is a popular alternative many policyholders use to access a quick, generous payment in a time of financial distress.

A life settlement is the sale of your life insurance to a third-party buyer who takes over premium payments in exchange for the policy’s death benefit. For the seller, this transaction provides a cash payout far greater than you would receive by surrendering your policy in some cases reaching 50% of the policy’s death benefit. You receive this in a single lump sum payment. There are no restrictions on the use of the proceeds.

Do you qualify for a life settlement?

If the face amount of your life insurance policy is at least $100,000 and you have had a change in health, you may qualify to sell your policy. Most types of life insurance qualify, including universal life, whole life, variable life, survivorship, group life and even term life. Every case is different, however, and the size of the payment is determined by variables such as your health, the type of insurance policy you have and the policy’s premiums.

The Tax Cuts & Job Act of 2017 (TCJA) simplified the tax consequences of selling your policy. Unless an exception is met, the sale proceeds will be taxed as follows:

1. Tax Free – Proceeds you receive up to your tax basis (i.e., the total amount of premiums you paid overtime) are not taxable;

2. Ordinary Income – Proceeds you receive in excess of your tax basis up to the amount of your policy’s cash surrender value are taxed as ordinary income; and

3. Capital Gains – Remaining proceeds are taxed as capital gains.

However, for insureds who meet the IRS definition of “terminally ill individual” or “chronically ill individual,” the entire amount of the sale proceeds can be received tax-free.

For those interested in exploring this option, we have a provider that specializes in helping seniors navigate the process of pursuing a life settlement through comprehensive guidance and educational resources.