Selling a life Insurance policy—commonly termed a “life settlement”—typically refers to the sale of permanent coverage, but some people inquire whether they can sell a term life insurance policy. This guide explores when and how you might sell your term policy, outlines important restrictions, and covers key facts, legal considerations, potential benefits, and downsides of selling your term coverage.
Direct Answer
It is sometimes possible to sell a term life insurance policy, but eligibility is limited and payouts are usually smaller than for permanent policies.
The process generally involves a “life settlement,” where a third party purchases rights to the policy, assuming premium payments, and collects the death benefit upon death.
Many term policies are not eligible to be sold unless they can be converted to permanent insurance; check your policy provisions.
Selling your policy yields a lump-sum payment, typically higher than its surrender value (if any) but lower than the death benefit.
You may need to be of a certain age or have specific health conditions to qualify; not all states or insurers permit such transactions.
The process typically takes weeks to months and involves underwriting and documentation.
Tax implications and the loss of your death benefit for your beneficiaries should be reviewed, and future insurability may be impacted.
Policies must meet minimum face-value thresholds, and not all buyers will consider lower-value or younger-insured policies.
Who This Policy Is For & Eligibility
Policyholders of term life insurance exploring non-traditional exit strategies (life settlements).
Generally applies to those who no longer need the policy (e.g., mortgage paid off, dependents grown) or can’t afford premiums.
Eligibility often requires the insured to be 65 or older, or facing a significant health change; each provider sets unique criteria.
Policies may need a face value above a set minimum (commonly $100,000 or higher).
Your term policy may be eligible only if it contains a conversion rider—allowing it to first be converted to a permanent policy before sale.
Some group term policies (employer-sponsored) are generally not eligible for settlement, or may have stricter requirements.
Special rules may apply for viatical settlements (for terminal illness situations—distinct from standard life settlements).
Key Facts (At-a-Glance)
Item
Details
Eligible Policies
Mostly convertible term; some direct term settlements possible but rare.
Minimum Face Value
Commonly $100,000+ (sample/illustrative); varies by buyer and state law.
Required Age/Health
Insured typically 65+ or significant health impairment; flexible by provider.
Payout Amount
Greater than surrender (if any), less than death benefit; payouts for convertible term often below 20%-30% of face value (sample/illustrative).
Claims Process
Lump sum payment upon sale; beneficiary rights transferred to buyer.
Conversion Clause
Conversion to permanent insurance often required to make term policy saleable.
Timeline
Several weeks to months; full medical/life underwriting often required.
Tax Consequences
Settlement proceeds may be taxable; verify with IRS resources for most current rules.
State Regulation
Subject to state settlement laws; consumer disclosure and protections apply.
Impact on Beneficiaries
Original beneficiaries lose rights; buyer collects death benefit.
Pros
Enables policyholder to receive cash for a policy that is no longer needed or affordable.
May provide more value than surrendering or letting the policy lapse without value.
Assists in funding long-term care, covering emergency needs, or supplementing retirement finances.
Offers flexibility, especially for those whose circumstances or health conditions have changed since purchase.
Cons
Payout is a fraction of the death benefit; beneficiaries no longer receive payout upon insured’s death.
Settlement proceeds may be subject to income tax, and eligibility for government assistance programs could be affected.
Loss of future insurability if you need life insurance again later (due to age/health changes).
Process involves underwriting, disclosures, and third-party approvals; can be time-consuming and invasive.
Market for term settlements is much more limited than for permanent insurance; most term policies will not qualify.
Sensitive personal health information may be disclosed to third-party buyers or brokers.
Costs & How Pricing Works
Payout for selling a term life policy is typically less than a permanent policy due to lack of cash value and limited duration.
Key factors: insured’s age, health status, premium amount, face value, time left in the term, and whether the policy is convertible.
Conversion to a permanent policy (required in most cases) increases costs and reduces net settlement value—insurers may charge higher premiums for conversion.
Broker fees and taxes reduce the cash you receive; settlement offers are based on actuarial review and market demand.
Settlement providers may require extensive health records and interviews as part of underwriting before making an offer.
It is important to compare multiple offers if considering this option, and request a full cost summary from any provider or broker.
Covered Services & Exclusions
Settlement transaction covers transfer of future death benefit and payment of remaining premiums to buyer.
Typical exclusions: non-convertible term policies generally cannot be sold; small face-value policies are rarely accepted.
Policies with very short remaining term periods are less attractive—buyers need time to realize a return.
If the policy is still within its contestability or suicide exclusion period, buyers may not be interested, or may reduce their offer.
Group/employer-provided term insurance is almost never eligible for sale; check with your insurer or human resources department for details.
Claims & Payout
The policyholder completes an application and provides medical records and policy documentation.
The settlement company evaluates the insured’s life expectancy and policy factors to set an offer.
If the policy is term and convertible, conversion paperwork is completed (may require new underwriting or medical review).
Legal transfer forms are signed; original owner/beneficiary rights are revoked in favor of the buyer.
Policyholder receives a lump-sum payment; buyer continues to pay premiums and claims the death benefit after insured’s death.
This content is for educational purposes only. It is not insurance, legal, or tax advice.
Policy terms, eligibility, and pricing vary by state and insurer; verify details on official sources.
Alternatives & Comparisons
Surrendering your policy (if any cash or return of premium is available) may provide a smaller payout but is simpler and faster.
Converting your term policy to permanent coverage for continued protection, even if not selling, could be evaluated; this often entails higher premiums.
Lapsing the policy (ceasing premiums) results in expiration with no benefit or value; only consider after exploring other options.
Accelerated death benefit riders—if offered—may permit partial collection during terminal illness (distinct from settlements; often no sale involved).
Side-by-Side Comparison
Feature
Sell Term Policy
Surrender/Lapse
Convert to Permanent
Payout Amount
Typically modest lump sum, less than face value
Little or none for pure term; more if ROP/cash value
None at the moment (future death benefit possible)
Beneficiary Effect
Third-party receives death benefit
Original beneficiaries lose protection
Original beneficiaries maintain protection (at higher cost)
Process Complexity
Moderate to high (application, underwriting, legal transfer)
Low (stop paying premium or file surrender)
Moderate (conversion paperwork, medical evidence possible)
Tax Implications
Possible taxable income; check IRS guidelines
Possible tax on interest only
Ongoing premiums may not be tax-deductible
Market Access
Limited; large settlement providers may reject many term policies
Universal; all policies can lapse or be surrendered
Limited to policies with conversion privileges
Quotes & Cost Drivers
Face value (death benefit size) and years remaining in term.
Insured’s age, health, and life expectancy based on underwriting reports.
Presence of conversion clause and costs to exercise it.
Current premium and payment history (policy must be in-force and in good standing).
Brokers’ or settlement providers’ fees; legal/document handling costs.
Coverage Optimizer Checklist
Verify if your policy allows for conversion and, if so, by what deadline.
Evaluate all available options—sale, conversion, surrender, or lapse—by total financial impact.
Calculate amount current beneficiaries would lose and tax impact before proceeding.
Check marketplace demand for settlement; some policies may receive zero offers.
Frequently Asked Questions
Is selling a term life insurance policy legal?
Selling is legal in most—but not all—states for eligible policies.
Policies must meet certain criteria; verify with your state insurance department.
Federal and state regulations protect policyholders with disclosure and process rules.
Do I need to convert my term policy to permanent insurance before I can sell it?
In most cases, yes—conversion to a permanent policy is required to make it eligible for settlement.
Conversion terms (timing, cost, evidence needed) are unique to each contract; review your plan’s provisions closely.
A minority of settlement providers may consider pure term policies if the insured’s life expectancy is very short, but this is rare.
Are the proceeds from a life settlement taxable?
Settlement amounts may be taxable depending on basis (what you’ve paid in premiums) and IRS rules for gains.
Life settlements may also affect eligibility for public benefits.
How do buyers determine how much they will pay for my term policy?
Price is set based on insured’s age, health status, policy value, and cost to keep policy active to expected life expectancy.
Policies with longer terms (remaining years) and larger face values are more attractive to buyers.
The settlement market for term life is less active, so offers may be limited or lower than permanent policies.
Can I change my mind after selling the policy?
Most states provide a rescission period where you can reverse the sale (often days to weeks) per state regulation.
After this window, the sale is irreversible; ownership and beneficiary rights are transferred and cannot be reclaimed.
Check state rules and all paperwork carefully during the process.
Conclusion & Next Steps
Selling a term life insurance policy is possible in select circumstances, primarily if your policy can be converted to permanent coverage or if you meet market and regulatory criteria.
This route can offer a higher payout than lapsing the policy, but involves complexity, tax, and a permanent loss of beneficiary protection.
Before proceeding, contact your insurer to confirm conversion rights and deadlines, then reach out to your state insurance department (official homepage) for settlement regulation information.
Compare all exit options before acting; verify buyer credentials with consumer authorities, and consult your state insurance regulator regarding current law and your rights as a policyholder.
