Seniors now have a new option available to them, which did not exist a few years ago. Instead of surrendering their Life Insurance Policy and receiving only what the Insurance Company will give them — they may be able to "sell" the policy to an Institutional Funder for much more cash than what the Insurance Company would pay.

By Jeffrey A. Azis, CPA, M.Acc.

Do you have a life insurance policy that is no longer needed?

Has your financial situation changed such that you no longer want life insurance?

Are you considering trading in your policy for another one in a "1035 exchange"?

A yes answer to either of these questions indicates that you may want to consider a "Life Settlement".

A "Life Settlement" (sometimes called a Senior Settlement) is the selling of a life insurance policy that is no longer needed, wanted, or affordable, for a lump-sum cash amount that is more money than what you will receive by surrendering the policy to the life insurance company. Rather than surrendering the policy to the life insurance company, the policy is sold to a third party - Life Settlement Provider, who, as the new owner, keeps the policy in-force by continuing to pay the subsequent premiums on the policy. Upon the death of the insured, the Life Settlement Provider receives the death benefit.

Historically, life insurance policy sales have occurred most often with policies insuring the lives of terminally ill individuals. These types of sales are called "Viatical Settlements". The same principles apply to Life Settlements, which are for life insurance policies covering persons who are at least 65 years old, do not have a terminal illness, and generally, have an estimated life expectancy of 3 – 15 years.

Any type of life insurance policy maybe used for a Life Settlement, including term, whole life, universal, survivorship policies, as well as variable life insurance policies. The policy need not have any cash value to be considered for a Life Settlement. The policy can be owned individually, by a business, by a charity or by an irrevocable life insurance trust. The policy owner may sell all or part of the policy, as desired.

Generally, in order to qualify for a Life Settlement, the life insurance policy must have a face (death) benefit of $ 250,000 or more. It has been estimated that 1 in 5 life insurance policies that insure an individual age 65 or over, will benefit from a Life Settlement. For those policies that can benefit from a Life Settlement, it is not unusual for the owner to receive 100 – 5,000 % or more cash then what they would receive by surrendering the policy to the issuing life insurance company.

The tax treatment to the owner that sells a life insurance policy will depend upon whether it is considered a

"Viatical Settlement" (i.e. the insured is terminally or chronically ill) or a "Life Settlement" (i.e. the policy owner is not terminally or chronically ill). If the sale is considered a Viatical Settlement under the 1996 Federal HIPAA rules, terminally or chronically ill individuals who sell their life insurance contracts will not have to pay Federal income taxes on the income they receive from that sale. Many states also have made Viatical Settlements free of income taxes.

If the sale is a "Life Settlement", then part of the income received from the sale maybe subject to Federal Income Tax. The proceeds from a Life Settlement are tax free up to the amount invested into the policy (i.e. premiums paid less any dividends or loans received by the owner). Any monies received in excess of the amount invested is considered profit and may be taxed at either ordinary and/or capital gain tax rates, depending upon the particular situation. The rules for taxing the sale or termination of a life insurance policy are somewhat complex, so a qualified tax advisor should be consulted before surrending or selling a policy.

How do "Life Settlements" work?

A policy owner is asked to complete an application and medical release form so that the Life Settlement Provider can gather information from the life insurance company and the insured’s doctors. All information gathered shall be kept confidential and will not be given to anyone without written approval from the insured. After reviewing the applicant’s life insurance policy and medical information, if an insurance policy qualifies, the Life Settlement Provider will make an offer for the policy.

The amount of money offered will be based upon various factors, including the insured’s life expectancy, the amount paid for premiums, the rating of the insurance company and policy provisions (e.g. waiver of premium, etc.). If the offer is accepted, the owner will be asked to sign a Life Settlement contract. The process for completing most Life Settlement transactions usually takes about 90 - 180 days.

Why would a policy owner want to sell their life insurance policy ?

A life insurance policy is the owner’s property. Life insurance policies maybe sold for any reason. A policy may be sold when the owner has determined he no longer needs or wants the policy. This may arise in circumstances such as business-owned policies where the insured is no longer connected to the business, or can no longer afford the policy or finds that it is inappropriate for his financial needs or where the insurance proceeds are no longer are needed to pay estate taxes. Individual policy owners may consider selling their existing life insurance policy to use the proceeds to fund a new, more cost-effective life insurance policy, to buy a paid-up long term care policy, to create funds to make gifts to family or a charity or to raise cash to pay off debts or make alternative investments.


If you no longer want or need your life insurance policy and are over the age of 65, you may want to consider a "Life Settlement ". For those policy owners that qualify, they now have the ability to get more cash for their policy, than what is available from the issuing life insurance company.

Because of the impact a Life Settlement can have on your personal financial and estate planning situation (liquidity, taxes, public assistance, etc.), you should contact your attorney, accountant or estate planning advisor, to find out what effect selling your life insurance policy will have on you.

Jeffrey A. Azis, is a Certified Public Accountant and holds a Masters in Tax. He concentrates his practice on tax and insurance planning for wealthy families.