There could be reasons to settle.© Africa Studio/stock.adobe.com, © Todayphoto/stock.adobe.com; Photo illustration Encyclopædia Britannica, IncYou probably bought life insurance because it fit your goals at the time—providing 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. It’s not for everyone, but depending on your situation, it could be worth considering.

　　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), it’s diverted to an outside investor—the person or entity who paid you the lump sum (whether an institutional investor group, fund, or “settlement broker” 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 policy’s face value.

　　Suppose you have a $250,000 life insurance policy with $20,000 in cash value. Your kids are grown and self-sufficient, and you’re 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 policy’s face value, or $75,000. That’s not close to the full death benefit of $250,000, but it’s much higher than the $20,000 cash value you’d 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 it’s important to confirm if the broker or company helping you sell your life insurance policy is properly licensed. Your state insurance commissioner’s website is a good place to verify credentials. If you have a variable life insurance product—which has a securities component baked in—make sure your broker is registered with the Financial Industry Regulatory Authority (FINRA). Use its BrokerCheck tool to see the broker’s history of regulatory actions and ensure it’s licensed to facilitate variable life policy transactions.

　　Life settlement investors set their own criteria, but in general, they’re 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.

　　Senior status. Although it’s possible to sell your life insurance policy as a younger person, settlements are more common—and come with higher payouts—for those 65 or older.Underlying health issues. Even if you’re 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. They’re permanent, build cash value, and don’t 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 they’re 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 policyYou might decide to sell a policy if its original purpose no longer fits—your beneficiaries don’t need the payout, premiums are weighing on your budget, or you’d rather redirect the money to other financial goals.

　　For example, let’s say you’re 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. You’d 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.

　　Set permissions. If you’re 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 FINRA’s BrokerCheck.Select an offer and complete the transaction. Once you’ve 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 policyA life settlement can provide cash, but it comes with trade-offs and financial consequences.

　　BeneficiariesOnce you sell, the buyer—not your loved ones—receives the death benefit. If providing for your family is still a top priority, selling may not be the right choice for you.

　　TaxesDepending 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 policy’s cash value at the time of the sale minus your total paid-in premiums is considered ordinary income and taxed at your marginal tax rate. Any additional proceeds you receive are taxed as capital gains. Public assistanceThe cash you receive from a life settlement may affect your eligibility for Medicaid and other types of assistance. The cash value of a life policy typically counts as an asset; the full death benefit isn’t considered an asset until it’s paid at your death. 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 costsBrokers 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 settlementSelling a life insurance policy isn’t the only way to meet your financial goals—you 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. You’d free up cash flow in your budget, but you would no longer have coverage. It’s worth considering if you’re offered a small payout, no longer need the coverage, and/or feel the cost of the premiums isn’t worth the monthly budget obligation.Surrender the policy. If you voluntarily surrender the policy to your insurer, you’ll typically receive the stated cash value minus transaction costs. This is also worth considering if you’re 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 don’t 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 you’re terminally ill—usually 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 lineA life settlement can free up cash and end the budget drain of premium payments—but it also means giving up your policy’s death benefit and possibly facing taxes or fees. Like any financial move, it’s 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 they’re 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.

　　ReferencesWhat You Should Know About Life Settlements | finra.orgWhy Life Settlements | lisa.org[PDF] Selling Your Life Insurance Policy: Understanding Life Settlements | naic.org