How to Sell Your Life Insurance in 2026: Life Settlements

A life settlement is a financial transaction in which a policyholder sells an existing life insurance policy to a third-party investor for a lump-sum cash payment greater than the cash surrender value (CSV) but less than the death benefit. This transfer is permanent and irreversible. Once completed, you can't regain ownership of the policy.

The buyer pays the premiums going forward and collects the death benefit upon the insured's death. Unlike policy loans or withdrawals, a life settlement transfers all policy rights to the buyer. The original policyholder receives cash now and retains no further interest in the coverage.

Viatical settlements are a subcategory that applies when the insured has a terminal or chronic illness diagnosis. Payouts are higher, 50% to 80% of the face amount, because the buyer's expected holding period is shorter. Under Section 101(g) of the Internal Revenue Code, viatical settlement proceeds may be excluded from federal gross income when the insured has a terminal illness with a life expectancy of 24 months or fewer.

Life settlement proceeds are subject to federal income tax under a three-tier structure. The portion up to your basis (total premiums paid into the policy) is tax-free. The amount between your basis and the policy's CSV is taxed as ordinary income.

Anything above the CSV is taxed at capital gains rates. Tax liability varies by policy, holding period and the seller's individual tax situation, so consult a tax professional before proceeding.

Viatical settlements follow different federal rules. When the insured has a terminal illness with a life expectancy of 24 months or fewer, or a chronic illness meeting the IRS criteria under Section 101(g) of the Internal Revenue Code, proceeds from a viatical settlement are excluded from federal gross income.

State tax treatment varies. Confirm your state's rules before accepting any offer.

This information is for educational purposes only and shouldn't be considered tax advice. Individual tax situations vary. Consult a qualified tax professional or financial advisor before making life settlement decisions.

Four alternatives to a life settlement may preserve more value or maintain some coverage depending on your situation.

• If your policy has an accelerated death benefit (ADB) rider, you can access a portion of the death benefit early without selling the policy if you get diagnosed with a terminal illness.
• A policy loan or withdrawal against the cash value keeps the policy in force, though an unpaid loan reduces the death benefit.
• Surrendering the policy for its CSV avoids ongoing premium payments and settlement complexity, but returns the lowest value of any option.
• Converting a term policy to permanent coverage preserves future settlement eligibility. If you hold a convertible term policy and your health has declined, converting before the conversion deadline locks in settlement eligibility.