Miranda is an award-winning freelancer who has covered various financial markets and topics since 2006. In addition to writing about personal finance, investing, college planning, student loans, insurance, and other money-related topics, Miranda is an avid podcaster and co-hosts the Money Talks News podcast.
Doug is a Chartered Alternative Investment Analyst who spent more than 20 years as a derivatives market maker and asset manager before “reincarnating” as a financial media professional a decade ago.
Before joining Britannica, Doug spent nearly six years managing content marketing projects for a dozen clients, including The Ticker Tape, TD Ameritrade’s market news and financial education site for retail investors. He has been a CAIA charter holder since 2006, and also held a Series 3 license during his years as a derivatives specialist.
Doug previously served as Regional Director for the Chicago region of PRMIA, the Professional Risk Managers’ International Association, and he also served as editor of Intelligent Risk, PRMIA’s quarterly member newsletter. He holds a BS from the University of Illinois at Urbana-Champaign and an MBA from Illinois Institute of Technology, Stuart School of Business.
A life settlement is the sale of a life insurance policy to a buyer for a lump sum of cash. The buyer takes ownership, pays future premiums, and becomes the beneficiary who collects the death benefit when the insured person dies. A settlement payment is usually more than the policyâs surrender value but less than its death benefit. Offers commonly range from 20% to 50% of the policyâs face value.
How do buyers price a life insurance settlement?
Buyers estimate a life insurance settlementâs value by starting with the policyâs future death benefit and subtracting the cost of keeping the policy active, including premium payments. They also consider the policyholderâs life expectancy and compare the future payout with what it is worth in todayâs dollars. Because the payment date depends on life expectancy rather than a fixed date, health and age can strongly affect the offer.
Who is a candidate for a life insurance settlement?
A candidate for a life settlement is often a person age 65 or older whose policy no longer fits their financial needs. Buyers may also consider people with health issues that shorten life expectancy, since this can increase a lump-sum offer. Someone who cannot afford premiums or whose beneficiaries no longer need the payout may qualify. The final amount offered still depends heavily on the personâs age and health.
You probably bought life insurance because it fit your goals at the timeâproviding peace of mind for your family, helping with estate planning, or offering tax advantages. But goals change, and so do financial realities. Maybe your kids are grown, premiums feel onerous, or you simply want cash for other priorities.
In some cases, you can sell your life insurance policy through a life settlement. That means transferring the policy to a buyer for a lump sum of cash. Itâs not for everyone, but depending on your situation, it could be worth considering.
Key Points
A life settlement lets you sell a life insurance policy in return for cash.
Term life policies can sometimes be sold, but usually bring significantly smaller payouts.
Selling a policy comes with trade-offs and consequences, including the loss of the death benefit and possible tax liabilities.
What is a life insurance settlement?
If you have a life insurance policy you no longer want or need, you may be able to sell it through a life settlement. Instead of letting the policy lapse or surrendering it for the cash value (minus fees), settling means you transfer ownership to a buyer in exchange for a cash payment. The buyer takes over the premiums and collects the death benefit when you pass. In other words, instead of the insurance payout going to your spouse or children (or another beneficiary), itâs diverted to an outside investorâthe person or entity who paid you the lump sum (whether an institutional investor group, fund, or âsettlement brokerâ that specializes in linking buyers and sellers).
The amount of money you receive for a life settlement is typically more than you would get by surrendering your policy, but less than the death benefit. Settlement offers typically range from 20% to 50% of your policyâs face value.
Life settlement vs. viatical settlement
A viatical settlement is designed for policyholders with a terminal illness and a life expectancy of about two years or less, or those who meet certain chronic illness criteria. Because the buyer expects to pay premiums for a shorter time, the offer is usually higherâfor example, 70% of the face value instead of 30%.
Suppose you have a $250,000 life insurance policy with $20,000 in cash value. Your kids are grown and self-sufficient, and youâre struggling to keep up with the monthly premium. You shop around and find out that after fees and other costs, you can walk away with 30% of your policyâs face value, or $75,000. Thatâs not close to the full death benefit of $250,000, but itâs much higher than the $20,000 cash value youâd receive by surrendering the policy.
Once you sell the life insurance policy in a settlement, the buyer becomes the beneficiary and will receive the $250,000 payout upon your passing.
Are you a candidate for a life settlement?
Life insurance is regulated at the state level, so itâs important to confirm if the broker or company helping you sell your life insurance policy is properly licensed. Your state insurance commissionerâs website is a good place to verify credentials. If you have a variable life insurance productâwhich has a securities component baked inâmake sure your broker is registered with the Financial Industry Regulatory Authority (FINRA). Use its BrokerCheck tool to see the brokerâs history of regulatory actions and ensure itâs licensed to facilitate variable life policy transactions.
Life settlement investors set their own criteria, but in general, theyâre looking for policies where the eventual payout is likely to exceed the capital required to acquire the policy and pay the premiums. The shorter your expected lifespan, the higher their potential return.
How life settlement buyers price a policy
A life settlement is priced much like any other security. The buyer looks at the future payout (your policyâs death benefit), subtracts the costs of keeping it active (premium payments), and weighs how much time is likely left on the clock. From there, itâs a time-value-of-money calculationâwhat todayâs dollars are worth compared to a future payoff.
The twist? Unlike a bond or other fixed-income asset, the âmaturity dateâ isnât fixed. It depends on your life expectancy. That uncertainty is what makes life settlement pricing both tricky and, well, a little morbid.
Are you a candidate for a life settlement? Here are a few characteristics:
Senior status. Although itâs possible to sell your life insurance policy as a younger person, settlements are more commonâand come with higher payoutsâfor those 65 or older.
Underlying health issues. Even if youâre healthy, you may qualify, but health problems that shorten life expectancy will typically increase the lump sum offer.
Changing financial needs. If you can no longer afford your premiums or if your beneficiary needs have changed, you may be accepted for a life settlement. However, the amount you receive will depend on your age and health.
Before you move forward, check with your insurer about eligibility and be prepared to authorize the release of your medical records.
What types of policies are eligible for a life settlement?
Not every policy type attracts the same interest from buyers.
Universal life policies are among the most common for life settlements. Theyâre permanent, build cash value, and donât expire as long as premiums are paid. Typically, buyers prefer policies in which the death benefit is at least $100,000, although some settlement companies will buy smaller policies.
Variable life policies can also qualify, but because theyâre tied to securities (e.g., stocks and funds), the sales process is more complex. If you go this route, be sure your broker is registered with FINRA and knows how to navigate the extra rules.
Term life policies are harder to sell. Because they can expire before a payout (in which case the buyer would end up with nothing), the offers are usually smaller and depend heavily on your age and health.
Steps to selling a life insurance policy
You might decide to sell a policy if its original purpose no longer fitsâyour beneficiaries donât need the payout, premiums are weighing on your budget, or youâd rather redirect the money to other financial goals.
For example, letâs say youâre 60 and have a $500,000 universal life policy. You pay about $6,000 a year ($500 per month) in premiums and have built up $70,000 in cash value. Youâd like to top up your retirement portfolio, so you decide to sell the policy. A broker shops around and comes back with a life settlement offer of $125,000. Not only would that give you a lump sum to invest, but it would also free up $500 per month that used to go toward premiums.
Hereâs how the process typically works:
Set permissions. If youâre both the policy owner and the insured, you can authorize the sale yourself. If not, the insured person must give permission for their medical records to be released. Remember: buyers value a policy based on life expectancy, so they will need to assess your medical history against actuarial tables and formulas.
Provide policy information. Potential buyers need information on the death benefit, premiums, cash value, and other terms and conditions. This information is compiled along with your medical records. Once the potential buyers receive your information, they will appraise the policy.
Receive and consider offers. Compare bids from several bidders (three to five is a good range). You can go directly to potential buyers (if you need a starting point, consider the Life Insurance Settlement Association) or work with a broker, who will charge a commission, but also help you with the legwork. If you decide to use a broker, remember to verify their credentials using FINRAâs BrokerCheck.
Select an offer and complete the transaction. Once youâve selected the offer you want, complete the paperwork, transfer the ownership, and receive your cash. Some states give you a short window to change your mind after completing the transaction. Make sure you understand your rights before you sign.
Considerations when selling a life insurance policy
A life settlement can provide cash, but it comes with trade-offs and financial consequences.
Beneficiaries
Once you sell, the buyerânot your loved onesâreceives the death benefit. If providing for your family is still a top priority, selling may not be the right choice for you.
Taxes
Depending on the value of your policy, its cash value, and how much you receive from the settlement, you may owe taxes. While you should double-check with your tax adviser, in general:
The amount you paid in premiums over the years is viewed by the IRS as money returned to you, so no taxes are assessed.
The policyâs cash surrender value at the time of the sale minus your total paid-in premiums is considered ordinary income and taxed at your marginal tax rate.
The cash you receive from a life settlement may affect your eligibility for Medicaid and other types of assistance. The cash surrender value of a life insurance policy can count toward Medicaidâs asset limits, although some policies are exempt. But once you receive proceeds from the sale of your policy, anything over and above the cash value will add to your asset base.
Transaction costs
Brokers and settlement companies take fees and commissions, which reduce your payout. Make sure the net amount you receive is worth the time, trouble, and expense.
Alternatives to a life insurance settlement
Selling a life insurance policy isnât the only way to meet your financial goalsâyou have other choices, each with its pros and cons.
Let the policy lapse. You could just stop paying your premiums and let the policy lapse. Youâd free up cash flow in your budget, but you would no longer have coverage. Itâs worth considering if youâre offered a small payout, no longer need the coverage, and/or feel the cost of the premiums isnât worth the monthly budget obligation.
Surrender the policy. If you voluntarily surrender the policy to your insurer, youâll typically receive the stated cash value minus transaction costs. This is also worth considering if youâre ineligible for a life settlement or your settlement offers are small.
Borrow against the cash value. If you have cash value built up, you can borrow against it. If you donât repay the loan, it (plus any accrued interest on the borrowed amount) is deducted from your death benefit. You still have to keep paying premiums to maintain the policy.
Reduce coverage. Some insurers will allow policyholders to reduce the death benefit in exchange for lower premiums.
Ask for an accelerated death benefit. Some policies will pay out part of the benefit early if youâre terminally illâusually up to 75% of the face value. The money is typically used to help cover medical expenses. (This is an alternative to a viatical settlement.)
The bottom line
A life settlement can free up cash and end the budget drain of premium paymentsâbut it also means giving up your policyâs death benefit and possibly facing taxes or fees. Like any financial move, itâs a balance of what you gain now versus what your beneficiaries lose later.
Remember that buyers price these policies with a time-value-of-money lens: future payout minus ongoing premiums, discounted back to today. That math puts a ceiling on what theyâre willing to pay. If you need liquidity quickly, you may not have much room to negotiate, so weigh whether the trade-off is worthwhile compared with other options.
Life insurance quiz: Test your knowledge
This quiz isnât easy, but life insurance is one of the biggest, most consequential financial decisions youâll ever make. Understand the details before signing on the dotted line.
