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If you have been diagnosed with a serious or life-changing condition, you may be able to obtain cash by selling your life insurance to companies that are not related to life insurance companies. The sale can occur either as a "viatical settlement" or a "life settlement" (which is also known as a "senior settlement.")

A viatical settlement involves the sale of a life insurance policy by someone with a short life expectancy. Age is not a factor in a viatical settlement.

In theory, a life settlement is the sale of a life insurance policy on the life of an insured who is age 60 or older. In reality, purchasers of life settlements also require that the insured has a limited life expectancy of 12 -- 14 years or less.

When considering whether or not to sell a life insurance policy, it is preferable to understand how a sale works and what it means to you -- including possible tax consequences.

While a viatical or life/senior settlement can be very beneficial, the sale process can sometimes be complicated. You can either go through the process yourself  or use a broker.

• If you do the process yourself, it is advisable to contact at least two purchasing companies. You will have to go through an interview, supply documentation and then compare offers.
• A broker will contact several settlement companies for you and do the work in exchange for a percentage of the proceeds. According to the NY Times, the commission in 2017 can be up to 30% of the price a company offers. 

As of 2017, 43 states have adopted life-settlement regulations, usually requiring that companies be licensed and make consumer disclosures.

For additional information, see: 

• History Of Selling Life Insurance Policies By Owners  
• What Is A Sale Of A Life Insurance Policy?
  
• Who Can Sell A Life Insurance Policy?  
  
• What Kind Of Life Insurance Policies Can And Cannot Be Sold?  
  
• How Much Can I Expect To Receive From A Sale Of A Life Insurance Policy?  
  
• Do I Have Any Responsibilities After A Sale Of A Life Insurance Policy?  
  
• Do The Proceeds From A Sale Of A LIfe Insurance Policy Affect Any Other Benefits?
  
• If You Are In Or Are Considering Filing For Bankruptcy
• The Process Of Selling A Life Insurance Policy  
• What Is The Best Way To Sell A Life Insurance Policy? 
• Tax Consequences Of A Sale Of A Life Insurance Policy As A Viatical Settlement?  
  • As A Life Settlement or Senior Settlement
  • As A Viatical Settlement 
• Frequently Asked Questions  
  • What if I outlive the time period estimated by the purchaser?
  • How do I assure confidentiality if I sell my life insurance?
  • What if my life insurance includes a double indemnity provision in the event of death by accident?
  • What if my policy includes the right to increase the death benefit?
  • Will anyone contact my beneficiary if I sell my life insurance?
  • Do I have to sell all of my policy or can I sell part of it?
  • Should I remove any cash value from my life insurance policy prior to a sale?
  • What if I have a problem with a purchasing company?

The viatical settlement industry began in the late 1980’s in order to provide people living with HIV/AIDS a means of obtaining money to finance medical treatments and other expenses not covered by insurance, to provide security, or fulfill postponed plans and dreams.

The first purchaser gave an owner/insured an amount of money which was determined by taking an educated guess at the insured’s life expectancy, and then applying a factor to it which would provide the purchaser a high rate of interest to reflect the risk and to give the purchaser a profit. When the insured died, the purchaser received 100% of the death benefit.

The industry has since evolved to include all life challenging illnesses, but the financial model has remained the same.

The industry now also purchases life insurance policies based on the insured’s age. This is known as a “life settlement” or “senior settlement,” and is generally not an option unless you are age 65 or above.

Due to early abuses, in most states, the industry is regulated and purchasers must be licensed.

In general, a "sale" of a life insurance policy is the transfer by the owner of all rights and interests in the policy, as well as all the obligations assumed under the policy.

• Right and interests that are transferred include the right to borrow against cash value, if any, as well as to appoint a beneficiary.
• Obligations include the continuing obligation to pay premiums.

The sale price is always less than the full benefit payable at death. The seller receives the sale price to do with as he or she pleases. The purchaser takes over paying the premiums on the policy. When the insured dies, the purchaser receives the entire death benefit. The seller or seller's estate has no further interest in the policy.

To learn more about the process of a sale, see The Process Of Selling A Life Insurance Policy, Sale Of A Life Insurance Policy -- Frequently Asked Questions.

Only the owner can sell a policy.

While the owner and the insured are typically the same, this is not always the case. For example, if your life insurance is group coverage through your employer, it is likely that your employer is the owner of the policy, and thus would need to sign off on a sale of your coverage.

If the owner and insured are not the same, generally the consent of the insured is required.

This is due to the practical requirement that potential purchasers insist on reviewing the insured's medical record in order to make their own assessment of life expectancy. Thanks to the federal law known as HIPAA and many state laws, medical records are confidential and cannot be disclosed without the consent of the patient.

To learn more see, HIPAA- Medical Records.

For a viatical settlement, the insured must have a diagnosis of a serious or life-challenging condition.

In theory, the insured has to have a statistical life expectancy of 5 years or less. The largest market is for people with a life expectancy of two years or less -- depending on the

For a life settlement, the insured must be 70 years of age or older.

In practice, the industry also requires that there be some type of medical condition that shortens the insured's life expectancy.

In order to be salable, purchasers look at the type of policy, the insurance company rating, whether the policy is subject to a contestable and suicide exclusion, whether there are any liens against the policy, and whether it is assignable.

Type of policy

Generally, any type of life insurance policy is salable, with a few exceptions. It doesn't matter if the policy is term life insurance or if it's a permanent policy. In theory it also doesn't matter if the life insurance is individual or group. In reality, buyers of group policies are a very small segment of the purchasing market.

With respect to specific policies about which there may be questions:

• Savings Bank Life Insurance (SBLI) policies are generally salable.
• Federal law permits the sale of Federal Employees' Group Life Insurance (FEGLI).
• Servicemen's Group Life Insurance (SGLI) and Veteran's Group Life Insurance (VGLI) are salable by converting the coverage from group to individual. The individual policy would then be salable.
• Credit Life Insurance is not salable.

Insurance Company rating

The insurance company issuing the policy must usually be rated A minus or better by a rating service such as Best's. Purchasers will consider

policies which are issued by less financially secure companies if the amount of the death benefit is equal to or less than the maximum insured by the guarantee fund in the state.

Contestable and suicide exclusion periods

The policy must be beyond the contestable period and the suicide exclusion period.

• The contestable period is the period just after a policy is issued during which the insurance company can contest validity because of a misstatement on the part of the insured or for fraud.
• The suicide period is the period just after the issuance of a life insurance policy during which the insurance company will not pay any benefit in the event of suicide - except possibly a return of premiums that were paid.
• The contestable period and suicide exclusion period usually run during the same period of time -- which is generally two years from the date the policy is issued.

If a contestable clause and suicide exclusion is the result of a conversion to an individual life insurance policy from a group life insurance policy:

• Ask your state Department of Insurance if these provisions can be enforced when an individual policy is converted from a group policy.
• Even if state law does not prohibit imposing a new contestable or suicide clause, ask the insurance carrier to waive the provisions. They are likely only in the policy because it is of the standard off-the-shelf variety, rather than a policy created for people who convert from group coverage. The reason for their inclusion in individual policies doesn't fit this situation.

Liens

The policy must be free of any liens. In this situation, a lien is a claim against the death benefit. For example, lien exists if you gave a creditor a right to receive part of the proceeds of your life insurance policy if you die still owing any part of a debt.

Assignment

There must be an ability to assign ownership of the policy. Some policies specifically prohibit assignment.

An offer to purchase is generally made as a percentage of the death benefit of the policy. Purchase prices range anywhere from 5% - 85% of the death benefit.

At the least, you should be paid 100 cents on the dollar for each of:

• The Cash Value in your policy, if any. (Cash value is like a savings account and is your money).
• Any premium you paid in advance. For instance, if you paid a premium for the coming year, and sell the policy on January 15, you should at least be reimbursed for every penny that relates to premiums from February through December, and likely from January 16 to January 31 as well.

With such a huge range, there are clearly a number of variables involved in determining price. These include:

• The insured's life expectancy on a statistical basis. Since determining life expectancy for any particular situation involves art rather than strictly science, life expectancy is likely to differ from purchaser to purchaser.
• Death Benefit ("Face Value") of the policy.
• The rating of the life insurance company.
• The dollar amount of premiums payable annually on the policy .
• Other policy provisions, such as a provision which waives further payment of the premium if the insured becomes disabled ("disability waiver of premium").
• The purchaser's general operating costs.
• The seller's negotiating ability.
• If a broker is involved, the amount payable to the broker.

• The amount of profit the purchaser looks to make on the transaction. The percentage is generally relatively high because purchasers know that life expectancy does not predict what will happen to any particular individual -- and that a cure may come along any day.

The sale of a policy eliminates any further rights and responsibilities to the insurer that you might have in a policy, including the responsibility of paying premium payments. However, you will have some type of contractual obligation to the purchaser of the policy.

For instance, purchasers want to know when an insured dies as soon after the death as possible. The longer a policy is outstanding, the less money the purchaser makes. Some purchasers keep track of an insured's continuing existence by searching data bases and using other mechanisms that don't involve the purchaser. At least one purchaser checks an insured's use of credit on the assumption that as long as the person is using a credit card, he or she is still on the planet.

Some purchasing companies:

• Send postcards on a periodic basis, asking that you confirm your address, sign and return the card. In such case, there is also a requirement to inform the purchaser if you move.
• Some companies call instead of sending a card.

Companies are usually somewhat flexible about the arrangements for maintaining contact, and may even allow you to name someone else as the "point person" to keep contact

Failure to follow the agreement will result in the purchaser taking steps to find out about your health status by contacting your spouse, significant other, or another family member, or by other means such as calling your doctor.

"Means based" benefits, such as Supplemental Security Income (SSI), Medicaid, or Food Stamps

The proceeds from the sale of a life insurance policy could affect eligibility for these types of benefits since one of the criteria for eligibility is the amount of your assets.

Social Security Disability Insurance ("SSDI"), disability income insurance policies, or disability programs at work

Since the amount of your assets does not affect eligibility for these benefits, proceeds from a sale do not affect your receiving these benefits.

Group life insurance

While the sale of a group life insurance policy does not usually affect other group insurance policies such as health insurance, several group contracts we've reviewed provide that the insurance could not be sold unless the insured agreed to leave the group. Leaving the group meant that the insured also had to give up his health insurance benefits as an active employee -- not something we would advise.

If you have any doubt about whether a sale would affect your benefits, speak to a benefits counselor at your national or local disease specific organization or to a social worker.

If you're in bankruptcy, or are considering filing for bankruptcy, it is advisable not to sell your life insurance.

An insurance policy is generally not counted as an asset in a bankruptcy proceeding. (If a policy has a cash value, the cash value may be considered to be an asset.)

Any cash that you receive as a result of selling a policy is considered an asset available to your creditors. Thus a sale during a bankruptcy proceeding or just prior to bankruptcy could potentially leave you with nothing. Consider speaking to your attorney if this is your situation.