Unless you have a Return of Premium contract, most term policies do not hold any cash value, so it may come as a surprise that you can sell your term life insurance policy for cash.
The concept of selling your life insurance may sound odd to some, especially if you only have a couple years of life left, but the reality is that as long as the numbers crunch in a profitable direction, an investor may be willing to take over your policy and pay the premiums until you pass away.
Someone with a short life expectancy may need access to cash for alternative cancer treatments and surgeries that may improve their quality of life, or even extend it. Others may need to retire from work as they can no longer perform at a high level all day, and still need an income to pay their living and medical expenses.
While having a terminal illness greatly increases the value of your term policy in a life settlement, the truth is that policies are also sold when the insured is around age 70 or older even if they don’t have any major health issues.
For healthy individuals in their 70s, their term policy must still have its conversion privilege. Most term policies have the option to replace your term contract with a new universal life contract. The new policy will provide coverage for life, and therefore is a safer bet for an investor than a term policy where you’re likely to outlive the term.
The deadline to convert your term policy is usually explained in your original policy contract, or if you can’t find it you can simply call your insurance carrier and ask - is my policy still convertible?
When we look at selling a policy we’re not converting your policy just yet, but rather we will order a conversion illustration to see how much this universal life policy will cost to keep in-force for the years ahead. With this illustration and your recent medical records, we can present your case to a wide range of investors. If you’re in poor health we will get a lot of offers, and if you’re in average health then we may only get one or two buyers interested, but if we can get $10k to sell your term policy, that is a great way to get some of your money back on a policy that was essentially worthless to you.
For someone who only has 5 years to live, we might get up to 50% of your death benefit, and when the life expectancy is even less around 2 years, we often get up to 70% of the death benefit. This is primarily due to the fact that the investment will require only a couple years’ premiums, and the interest that accrues on the investment will also be minimal, so even a large payout is possible when the investor has strong confidence that they will get their investment back in just a few years.
It’s the cases where an insured is 70 years old and has no major health concerns that leave a lot of room for error in their projections. The insured might live another 20 - 25 years, or perhaps they only have another 5 or 6 years. Statistics will show that it’s probably closer to 15 years, but the investor has no idea, and therefore there is much greater risk, so they’re only willing to offer a small amount. And in these situations, in essence an investor is willing to pay you $10k or $15k to fill out some paperwork, which is a pretty good deal.
A lot of applicants will figure out pretty quickly that the less time you have on earth, the more money you’re going to get in a settlement. I’ve spent many hours on the phone hearing clients tell me about all of their ailments only to find out that their underwriting came in fairly long, so what goes into this process?
When selling your life insurance policy, here are the basics steps you'll go through:
Finding a broker: The policyholder shares information about their life insurance policy and health with one or more interested brokers to determine if their policy is sellable.
Making the sale: The broker connects the policyholder to a new buyer who will take over the policy. The buyer pays the policyholder an agreed-upon sum. The policyholder is absolved of all costs related to the account, and the buyer makes the premium payments on their behalf.
Receiving the death benefit: When the policyholder dies, the death benefit goes to the buyer instead of the originally-listed beneficiaries. (1)
First of all, when you apply for life insurance, the underwriter is looking for any possible thing to reduce your health rating, whereas when you apply for a life settlement the underwriter is looking for things that provide predictability. As an example, someone with back pain is probably not going to die of back pain. Might it reduce their mobility over time, slowing them down, and perhaps eventually ending their life? Possibly, but there’s nothing that proves this consistently happens. Same goes for someone who’s had heart problems in the past. Blood pressure medicine is a common treatment for high blood pressure, and someone who had a heart attack a few years ago might have another one next year, or may never have another one as they’ve made lifestyle changes to reduce those chances. But something like stage 4 cancer is a strong indicator of how many years someone has left.
What’s typical is underwriters will review the last 3 - 5 years of medical records. They want to see your primary records as well as any specialists you see such as an oncologist, cardiologist, pulmonologist, etc. Orthopedic records are not typically considered as a broken bone doesn’t necessarily tell us how many years you have left. The other reality is that these underwriting reports can range. One report could say 7 years, another says 9, and another says 5. For the sake of getting a life settlement offer, we want the 5 year report while hoping that you might actually live for another 9 years. Nothing is in-fact, and no one can truly predict how long they have, but investors need a proxy to calculate what they can offer to buy your policy without losing their shirt on the investment.
So if you’re wondering - can I sell my term life insurance policy for cash, the answer is yes, sometimes you can. And to have your case presented to many different buyers to give you the most exposure, I would recommend working with a life settlement broker. Assuming your insurance carrier pays a commission to convert your policy, the broker's compensation is often covered by this conversion commission.
FAQs
How can I sell my term life insurance policy for cash?
Work with a life settlement broker who can help you order the correct conversion illustration, prepare your case for market, and give you the most exposure to different buyers. There is no set price for selling a policy, but rather what the market is willing to pay for it.
How fast can I expect to receive cash from selling my term life insurance policy?
The average life settlement takes 3 months from start to finish. Sometimes it can be done faster, other times slower depending on the motivation of the seller.
How much cash can I expect to receive for my term life insurance policy?
Every case is unique and is dependent on the life expectancy of the insured and the cost of future premiums. The longer someone is expected to live, the less money they get. Since term policies are often expensive to convert, on average people tend to get $10k - $30k for average health. Others can get much more if they're in poor health.
Are there any taxes or fees associated with selling my term life insurance policy?
While I'm not a legal tax advisor, my understanding is that the IRS considers your premiums paid to be your tax basis, and anything you make beyond that in a settlement is considered profit, and therefore taxed as long term capital gains. This rarely happens as it's more common someone spends $40k in premiums over the years and receives a settlement for $20k. This would be considered non-taxable since you did not profit on this investment.
4 years in life settlements
About the author:
I'm a life settlement advocate who became passionate about the industry when I helped my grandfather secure over 60% of his death benefit. Recently, I assisted an 81-year-old woman with $140k annual premiums by finding an investor to buy out her policy while still receiving most of her investment back.
I've also helped clients with expiring term policies receive payouts of $10k - $15k by converting to a new universal life policy. I enjoy educating both agents and clients on the potential benefits of life settlements and am always happy to provide feedback on potential cases.