How to Sell Your Life Insurance in 2026: Life Settlements

A life settlement lets you sell an existing life insurance policy to a third-party investor for a lump-sum cash payment. That payment is more than the cash surrender value (CSV) but less than the death benefit. The sale is permanent. Once it's done, you can't get the policy back.

The buyer assumes the premiums and collects the death benefit upon the insured's death. A life settlement works differently than policy loans or withdrawals: it transfers all policy rights to the buyer. You get cash now, but you keep no further stake 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.

• Using an accelerated death benefit (ADB) rider lets you access part of the death benefit early without selling the policy, if you're diagnosed with a terminal illness and your policy includes this rider.
• Taking a policy loan or withdrawal against the cash value keeps the policy in force, though an unpaid loan balance reduces the death benefit.
• Surrendering the policy for its CSV avoids ongoing premiums and the complexity of a settlement, but it results the lowest payout 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 deadline locks in that eligibility.

Consider a life settlement if you no longer need the coverage, for instance, because the children it was meant to protect are now financially independent. It can also make sense if premiums have become unaffordable and the policy is about to lapse, or if you need cash for medical care, long-term care, or another major expense that other financing options won't cover.

A life settlement is the wrong choice in one case: your beneficiaries still need the death benefit. Once the sale closes, they receive nothing, even if you die the next day. Check for cheaper alternatives first. A policy loan can free up cash without ending your coverage. So can a reduced death benefit or an accelerated death benefit rider.

Get quotes from more than one licensed provider before you decide. Compare each offer against your policy's CSV. Then confirm how the payout affects your taxes and any Medicaid or SSI benefits you receive.