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Thinking about selling your life insurance policy? Here are a few things to consider.

What is the difference between a viatical and a life settlement or senior settlement?

Viatical settlements (or life insurance policies with a “living benefit rider”) specifically involve a policyholder with a terminal illness who wishes to sell his life insurance policy for immediate cash and needs the money for medications or treatment; the seller typically has a life expectancy of five years or less. Life settlements involve policyholders, often seniors or high-net-worth policy owners age 65 or older, who are not gravely ill but who have impaired health. A life settlement is typically the sale of an existing life insurance policy for more than its cash surrender value (if there is one) but less than its net death benefit.

How do I know if I’m eligible to sell my policy?

You must be a senior citizen age 65 or older; generally your life expectancy is at least two years or up to 12 to 18 years. (Persons with life expectancies under two years sell their policies as viatical settlements.) Often you must have held the policy for at least two years (that’s the length of the standard contestability clause).

What types of life insurance are eligible for life settlements?

Types of policies eligible are term, whole, universal and key man (for businesses) and second-to-die policies (also called survivorship life). The most attractive types for buyers are convertible term life and universal life. Face amounts must be $250,000 or more. group life insurance is not of interest to life settlement providers, although converting the group policy to an individual policy would make it sellable.

How much can I expect to get for my policy?

Every policy is evaluated individually by life settlement companies. A life settlement offer will be computed based on your life expectancy, type of policy, policy face value, premiums required to keep it in force and the rating of the insurer that issued the policy. Examples would be a policy from a carrier rated B+ or better by A.M. Best, with premiums of less than 10 percent of the net death benefit, and a cash surrender value of less than 25 percent of the net death benefit.

According to the Life Insurance Settlement Association (LISA), in 2006 (the most recent data) life settlements of 11 major providers unlocked roughly $1 billion in additional income to consumers. Consumers received a 78 percent increase in funds above the cash surrender value. In 2006, life settlements provided an average of 409 percent more cash to consumers than the option of surrendering the cash value of their policies. On average, the policy value increased by 6.7 percent from previous years, and settlements paid to customers increased by 10 percent. If your policy has a cash value, you should make sure to receive more than the cash surrender value of your policy if you enter into a life settlement contract. Contact your life insurance company to find out your current cash surrender value. The American Council of Life Insurers provides the following chart that illustrates typical payout at face value based on age.

Age at issue

35 50 65 80

Estimated max. payout
as % of face value

5% 16% 26% 52%

How do I find a reputable life settlement broker?

Life settlements are financial transactions best handled by professional advisors such as CPAs, attorneys, certified financial planners or certified estate planners. There are life settlement brokers who will “shop around” your policy to get you the best offer.

The Life Insurance Settlement Association has a list of members on its Web site who can broker a settlement.

Check with your state department of insurance to find out if your broker and settlement company are licensed, or even required to be licensed. Regulation of these transactions vary widely.

What are the laws regarding life settlements?

Regulations are patchy across the country. In states such as Missouri, Rhode Island and South Carolina , where life settlements are not regulated, you should be aware that:

  • There are no requirements for disclosure, such as tax implications or affiliations between the broker and settlement company.
  • There are no advertising guidelines.
  • Life settlement “agents” are not required to be trained or licensed.
  • The insurance department can provide only limited assistance if something goes wrong with your policy or you have a complaint.
  • Life settlement companies may encourage you to buy a new policy for the sole purpose of selling it.

What are the alternatives to a life settlement?

There are many alternatives depending on your reasons for wanting to get out of the policy. See alternatives to life settlements.

Are life settlements taxable?

Yes, proceeds are taxable as regular income. Contact a tax advisor for information.

Are there any other financial implications to selling my policy?

In addition to possible tax consequences, receiving money from a life settlement may affect your eligibility for public assistance programs such as Medicaid. Also, if you’re having financial difficulties, in some states your life settlement proceeds may be subject to creditors’ claims.

You’ll also be charged commissions and fees by a variety of players within the transaction. See Life settlements: To sell or not to sell for a list of typical fees.

What do I do if I suspect fraud in a life settlement transaction?

Contact your state department of insurance immediately if you feel you have been subject to misleading sales practices or fraud by a viatical or life settlement company. However, if your state doesn’t regulate life settlements, there may be little that the insurance department can do.

Can I change my mind?

Your settlement contract should specify how many days you have to change your mind after the sale, usually up to 15 days.

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