How to Sell Your Life Insurance Policy (and Maybe Still Sleep at Night)
So, you bought a life insurance policy ages ago, back when your biggest concern was who’d inherit your record collection. But now you’re wondering—can you actually sell your life insurance policy for cash?
Yes, you can! And no, it’s not shady—it’s called a life settlement, and thousands of people do it every year. Whether you’re downsizing, paying medical bills, or just want to trade that policy for a vacation fund, this guide will help you get the most from your sale—without getting lost in jargon or paperwork avalanches.
What Does It Mean to Sell a Life Insurance Policy?
Selling your life insurance policy means you transfer ownership to someone else—an investor or company—who takes over paying premiums and collects the death benefit later. In return, you get a lump sum now (usually more than the cash surrender value, but less than the policy’s total death benefit).
This transaction is known in the biz as a life settlement. When the seller is terminally ill, it’s often called a viatical settlement—same concept, just different life‑expectancy math.
Here’s a quick cheat sheet:
| Term | What It Means | Who It’s For |
| Life Settlement | Sale of a life insurance policy to a third party for cash | Policyholders typically 65+ or those with reduced coverage needs |
| Viatical Settlement | Sale of a policy by a terminally ill person | People with terminal illnesses or shorter life expectancies |
| Cash Surrender | What your insurance company offers if you give up the policy | Anyone canceling directly with their insurer |
Why Would Anyone Want Your Policy?
Good question! Believe it or not, investors love predictable money, and life insurance is about as predictable as it gets—eventually, it pays out. Life settlement companies calculate your life expectancy, the policy’s premiums, and the death benefit to estimate what they’ll earn. It’s morbid math, but it’s legal and regulated (so nobody’s literally betting against you).
Step-by-Step: How to Sell Your Life Insurance Policy
Step 1: Make Sure You’re Eligible
Not every policy qualifies. Standard requirements include:
- You’re typically 65 or older (younger people can qualify if health has declined).
- The policy has a death benefit of at least $100,000.
- The policy type is whole life, universal life, or convertible term.
If you meet those, great—you’re halfway to cashing out your coverage.
Step 2: Team Up with a Broker or Settlement Company
A life settlement broker is like a real estate agent for your policy. They get quotes from multiple buyers and help you snag the best deal. A direct settlement provider, on the other hand, buys policies themselves—faster, but often for less.
Brokers and providers will request:
- Policy details and current statements
- Your medical records (yes, even the ones where you refused to admit you eat nachos for dinner)
- A life expectancy report
Pro tip: always use a licensed broker. They’re regulated by your state’s Department of Insurance.
Step 3: Collect Offers and Compare
You’ll receive multiple offers from investors. The amount depends on:
- Policy size and premium cost
- Your age and health
- The insurance company’s financial strength
Think of it as a reverse auction where bidders compete for your coverage.
Step 4: Accept the Offer and Sign the Paperwork
Once you choose the best offer, you’ll sign a purchase agreement. Expect a stack of documents longer than your Christmas gift list, but hey—that’s paperwork protecting both sides.
Usually, funds go into escrow until all documents clear and the insurer transfers policy ownership.
Step 5: Get Paid
After the transfer, you’ll get your lump sum—typically 20% to 60% of your policy’s death benefit. Congratulations—you just turned your life insurance into living cash.
The Tax Stuff (Because Uncle Sam Always Shows Up)
Yes, selling your policy triggers taxes. Here’s the gist:
- The portion equal to your policy’s cost basis (total premiums paid) is tax-free.
- Money above that but below the cash surrender value is ordinary income.
- Anything over the cash surrender value counts as capital gain.
Example: You paid $50,000 in premiums. Your surrender value is $70,000. You sell for $100,000.
- First $50k: not taxed
- Next $20k: ordinary income
- Final $30k: capital gain
Always consult a CPA or tax professional before finalizing a sale.
Can You Sell Term Life Insurance?
Usually, no, because once the term ends, the policy expires—kind of like a carton of milk. However, convertible term life policies can sometimes be flipped into permanent coverage, and then sold.
That’s a great option if your health worsened after buying the term policy.
When Selling Makes Sense
Here are some times when selling might be smart:
- You no longer need the coverage (the kids are out of college, the mortgage is paid).
- Premiums are unaffordable.
- You want to free up cash for retirement, travel, or medical expenses.
- The policy no longer serves your estate or financial goals.
But skip selling if your beneficiaries still depend on that payout, or if you can afford to keep it and use the policy for estate planning or tax purposes.
Life Settlement vs. Viatical Settlement—What’s the Difference?
A life settlement is typically when you’re older but otherwise healthy. A viatical settlement applies if a medical condition shortens your life expectancy substantially.
Viatical settlements generally pay a higher percentage of your death benefit because the buyer doesn’t expect to pay premiums for long. Also, these proceeds may be tax-free if you qualify under IRS rules for “terminally ill” individuals.
The Good, the Bad, and the “What Did I Just Do?”
The Pros
- You get immediate cash, often much more than your insurer’s surrender value.
- You no longer pay costly premiums.
- You can use the money for anything—retirement, healthcare, or a pool shaped like a duck.
- Licensed settlements are regulated transactions, not back-alley deals.
The Cons
- Your beneficiaries lose the death benefit.
- You might owe taxes.
- The income could affect Medicaid eligibility or creditor claims.
- Unlicensed buyers or brokers can be shady—avoid anything that feels “too good to be true.”
How to Get the Best Offer (and Not Get Fleeced)
- Compare multiple quotes—don’t take the first offer.
- Verify licenses with your state’s insurance department.
- Ask about fees—brokers charge a commission, usually 3–8%.
- Request written projections and payment estimates.
- Get everything in writing (verbal promises don’t count in this business).
The Legal Side (Boring but Crucial)
Each U.S. state regulates life settlements differently. Most require:
- Licensing for brokers and providers.
- Full disclosure of fees and offers.
- A 15-day free-look period (basically, a “do-over” if you change your mind).
Always check your state’s Department of Insurance website for current laws. California, New York, and Florida have detailed settlement statutes to protect consumers.
Selling Isn’t the Only Option
If parting ways with your policy feels drastic, consider alternatives:
- Borrow against it – take a policy loan to cover expenses without giving it up.
- Reduce coverage – lower your death benefit to cut premiums.
- Use accelerated benefits – some policies allow early cash-out for terminal illness.
These can help you keep some protection while accessing needed funds.
Final Thoughts: Cashing Out the Smart Way
Selling your life insurance policy is like holding a yard sale for your financial future—you need to know what your stuff’s worth before anyone else does.
Handled wisely, it can be a win-win: you free up cash and lighten your monthly bills. Handled poorly, it can mean extra taxes, regrets, and awkward holiday conversations with your heirs.
So shop around, get professional help, and remember—you can’t take your policy with you, but you can definitely put it to good use now.