Do You Even Qualify? Start Here

Before anything else, run the gate. If you don’t clear it, the rest of this guide is interesting but not actionable for you right now.

Age

Life settlement companies almost always want the insured to be 65 or older, and offers improve with age. The exception is a viatical settlement, which is a separate transaction available to people of any age who are terminally or chronically ill. Most policyholders who sell are in their 70s or 80s.

Policy size

Face value of $100,000 is the typical floor. Policies of $250,000 and up tend to attract more competitive bidding, simply because the math works better for buyers. Anything smaller than $100,000 is a tough sell — a few specialty providers will look at smaller policies, but the offer percentages tend to be lower and the broker fees can eat the upside.

Policy type

Universal life is the workhorse of the life settlement market. Whole life sells too. Convertible term policies qualify if the term is converted to a permanent policy as part of the transaction — most buyers will handle that conversion at closing. Non-convertible term policies generally can’t be sold unless the insured has a terminal or chronic illness, in which case a viatical settlement may be possible.

Health

Counterintuitive but important: a decline in health since you bought the policy increases its market value. Buyers are pricing how long they’ll have to pay premiums before collecting the death benefit. Common conditions like diabetes, heart disease, COPD, or a cancer history can meaningfully raise an offer. You don’t need to be terminally ill — that’s the viatical track, not the life settlement track.

How long you’ve owned the policy

Most states require you to have owned the policy for at least two years before you can sell it. A handful of states require five, and Minnesota requires four. Almost every state allows an exception if the insured is terminally or chronically ill, divorces, retires, or becomes disabled.

The verdict: if you’re 65+, your policy has at least $100,000 of face value, it’s a universal, whole, or convertible term policy, and you’ve owned it for two-plus years, you qualify. Keep reading. If you don’t tick those boxes, jump to the alternatives section — there’s probably a better fit there.

What Your Policy Is Actually Worth

This is the number you came for, so let’s not bury it. Industry data from the Life Insurance Settlement Association (LISA) and major life settlement providers puts the typical payout at 10% to 25% of face value, with the average landing around 20%. Some sellers do significantly better. Some do worse. The spread is wide because the inputs vary a lot from one policy to the next.

For context: the cash surrender value the insurance company would pay you to walk away is usually 3% to 5% of face value. So a life settlement typically pays four to seven times what you’d get from surrender. That’s the gap that makes this market exist.

The four variables that move the offer

Life expectancy. This is the biggest single factor. The shorter your projected life expectancy — based on age and health — the higher the offer. Buyers run your medical records past one or more independent life expectancy underwriters, who produce an estimate in months. That number, more than anything else, drives the price.

Premium load. The buyer is going to pay every premium from closing until the death benefit pays out. A policy with low or moderate premiums relative to the death benefit is more valuable than a policy that’s bleeding cash to stay in force. If your universal life policy has a healthy cash account that can be drawn down to keep premiums low, that helps.

Face value. Bigger policies tend to attract more bidders. The transaction costs (legal, underwriting, escrow) are roughly fixed, so larger policies have better economics for buyers. A $1 million policy at 20% pays $200,000; a $100,000 policy at 20% pays $20,000 — and after broker fees on the smaller deal, the seller can be left with a payout that doesn’t justify the effort.

Policy type and rating class. Universal life with flexible premiums is preferred. Whole life is fine. Term policies need to be convertible. Variable products are sellable but trigger securities regulation, which complicates the process and narrows the buyer pool.

A realistic example

Consider a 78-year-old with moderate health issues — controlled diabetes, a prior cardiac event — and a $500,000 universal life policy with reasonable ongoing premiums and a small cash value. A typical offer range in today’s market would be roughly $75,000 to $125,000, or 15% to 25% of face value. The same person at 70 in good health might see offers closer to 10%. At 85 with significant health decline, offers can climb to 30% or more. Anyone who quotes you a fixed percentage before they’ve seen your medical records is guessing.

Life Settlement Companies: Who’s Who and Who Works for You

The industry has two kinds of players, and confusing them is the most expensive mistake a seller can make.

Providers (buyers)

A life settlement provider is the company that actually buys your policy. Providers are usually backed by institutional investors — pension funds, hedge funds, family offices — who hold portfolios of policies. When you contact a provider directly, you get one buyer’s offer. That offer reflects what that provider is willing to pay, not what the market is willing to pay. The two numbers are not the same.

Brokers (representatives)

A life settlement broker represents you, the policy owner. The broker takes your policy to multiple licensed providers, collects competing bids, and helps you negotiate. In most states, brokers owe a fiduciary duty to the seller. They charge a commission, typically a percentage of the gross offer or the amount above a baseline, deducted from the proceeds.

FINRA’s 2023 investor guide on life settlements is direct on this point: working with only one buyer or accepting a single offer — especially one prompted by a TV ad, a mailer, or a cold call — puts the seller at a disadvantage. The honest answer to “how do I know I’m getting a fair price?” is “you ran an auction.” A broker is how most policy owners run that auction.

Which one should you use?

Going direct to a provider is faster and you keep the broker commission. It can make sense if you’ve already shopped the policy elsewhere and have a credible reference price, or if your policy is small enough that broker fees would eat too much of the upside.

Using a broker is the default for most sellers and the path FINRA recommends. The competitive bidding usually more than offsets the commission, and the fiduciary duty matters when you’re not an expert in pricing your own policy. If you go this route, get the fee structure in writing before you sign anything.

How to Vet a Life Settlement Company

This is the trust section. The industry is more regulated than its reputation suggests, but reputation exists for a reason — there are still bad actors and a lot of pressure-sales tactics aimed at older homeowners. Here’s how to filter them out.

Confirm the license

Most U.S. states regulate life settlements through their insurance departments. Both providers and brokers have to be licensed in the states where they do business. Before you give anyone your medical records, look the company up on your state’s Department of Insurance website. Search for the company name and the individual broker’s name. Check for active license status and any disciplinary record. This takes ten minutes and is non-negotiable.

Check LISA membership

The Life Insurance Settlement Association is the industry’s primary trade group, and its member directory is public. Membership isn’t a guarantee of quality, but it does signal that the company has agreed to a code of ethics and is operating openly in the market. Companies that aren’t licensed and aren’t on any industry list are a red flag.

For variable policies, check FINRA

Variable life insurance is a security, so transactions involving variable policies fall under federal securities law. Anyone advising on or transacting in variable life settlements has to be FINRA-registered. Use FINRA BrokerCheck to verify registration and review disciplinary history. If the policy is variable and the company can’t show FINRA registration, walk away.

Demand transparency on compensation

Ask, in writing: how is the broker paid? What percentage? Of what number? Is there a baseline below which the broker takes nothing, or does the broker get a cut of the entire offer? Is there a flat fee on top of the commission? You should never sign a brokerage agreement that doesn’t spell this out clearly.

Watch for these red flags

• Unsolicited offers. Cold calls, mailers, and door-knockers offering to buy your policy are almost never the best route to a fair price. The good buyers don’t need to find you that way.
• Pressure to decide fast. Legitimate offers are valid for weeks, not hours. Anyone pushing you to sign today is selling, not advising.
• Vague answers about who ends up owning the policy. You’re entitled to know whether the buyer holds policies themselves, packages them with others, or resells interests to outside investors. Vague answers here are a privacy concern, not just a curiosity.
• Loose handling of medical records. Your authorization should be specific about who receives what. HIPAA-compliant procedures are the floor, not a feature.
• “Free” appraisals with strings attached. Some companies offer no-cost valuations that come bundled with exclusivity clauses locking you into them as the buyer. Read the fine print before you sign anything labeled “appraisal.”

The Process, Start to Finish

From first call to funds in your account, plan on two to four months. Here’s the sequence.

1. Application and authorizations

You complete an application with policy details — carrier, policy number, face value, premium, current cash value — and sign HIPAA authorizations releasing your medical records to the broker or provider. You’ll also authorize the insurance carrier to share policy information.

2. Records gathering

The broker or provider requests records from your physicians and from the insurance company. This is the slowest step. Doctors’ offices are not in a hurry. Two to six weeks is normal.

3. Life expectancy underwriting

One or more independent life expectancy firms review your medical history and produce a life expectancy report — typically expressed as a median number of months. Buyers use these reports to price the policy. If you go through a broker, the broker may order multiple life expectancy reports because outside-vendor variation is real and a more favorable estimate produces better offers.

4. Offer (or competing offers)

If you went direct to a provider, you get one offer. If you used a broker, the broker shops the policy to multiple licensed providers and presents the bids to you. Offers are typically valid for a defined window, often 30 days.

5. Contract and disclosures

Once you accept an offer, you sign a life settlement contract. This is a state-approved document with required disclosures: the gross offer, broker compensation, your rescission rights, what happens to the policy after sale, and the alternatives you considered. Read the disclosures carefully. They exist because past sellers got surprised, and reading them is how you avoid being the next one.

6. Rescission window

State law gives you a rescission period — a window during which you can cancel the deal after signing. The length varies by state but typically runs from 15 to 30 days from contract signing or from receipt of payment. Use the window to sit with the decision.

7. Escrow and closing

The buyer wires the purchase price into a state-approved escrow account. You sign the change-of-ownership and change-of-beneficiary forms. The insurance carrier processes the change. Once the carrier confirms, escrow releases the funds to you.

8. Post-closing

The buyer takes over all premium payments. They periodically verify your status through tracking services. When you die, your designated contact notifies the buyer, who files the death claim with the carrier. Your original beneficiaries are no longer involved.

Taxes: The Part Most Articles Get Wrong

Most online articles on life settlement taxation are out of date. The rules changed twice in recent years, and the current framework is the one that matters.

The Tax Cuts and Jobs Act of 2017 (Section 13521) amended the way basis is calculated on the sale of a life insurance contract. The IRS issued Revenue Ruling 2020-05 in January 2020 to walk through how the new basis rules play out. The combined result is the current three-tier framework.

The three tiers

Tier 1: Up to your basis — tax-free. Your basis is the total premiums you’ve paid into the policy. Under the old rules (Rev. Rul. 2009-13), basis was reduced by the cost of insurance, which made the taxable gain larger. The Tax Cuts and Jobs Act eliminated that reduction. Today, your basis is total premiums paid. Proceeds up to that amount come back to you tax-free.

Tier 2: Between basis and cash surrender value — ordinary income. If your settlement proceeds exceed total premiums paid, the next slice — up to the policy’s cash surrender value — is taxed as ordinary income. This is the same treatment you’d get if you simply surrendered the policy.

Tier 3: Above cash surrender value — long-term capital gain. Anything above the cash surrender value is treated as long-term capital gain, taxed at preferential rates.

A worked example

Suppose you’ve paid $80,000 in total premiums on a policy with a current cash surrender value of $50,000. You sell it in a life settlement for $150,000.

• The first $80,000 (your basis): tax-free.
• Cash surrender value is $50,000, which is less than your basis, so there’s no Tier 2 ordinary income on this transaction.
• The remaining $70,000 ($150,000 sale minus $80,000 basis): long-term capital gain.

Now flip the numbers. Suppose total premiums paid were $40,000, cash surrender value is $60,000, and you sell for $150,000.

• The first $40,000: tax-free.
• The next $20,000 (from $40,000 basis up to the $60,000 cash surrender value): ordinary income.
• The remaining $90,000: long-term capital gain.

One important note on viatical settlements: if the insured is terminally ill (life expectancy under 24 months) or chronically ill, the proceeds may be entirely tax-free under Section 101(g) of the Internal Revenue Code. That’s a separate set of rules from life settlement taxation, and it’s a meaningful reason to figure out which transaction you’re actually doing.

Run any real numbers past a tax professional before closing. The framework above is correct; the application to your specific situation is what a CPA gets paid to nail down.

Your Other Options

A life settlement isn’t always the right move. Here are the main alternatives, and when each one is genuinely the better fit.

Accelerated death benefit rider

Many modern policies include a rider that lets you draw a portion of the death benefit early if you become terminally ill or have a chronic care need. This is usually faster than a life settlement and, depending on your situation, may be tax-free under IRC Section 101(g). If you have a serious diagnosis and a rider on your policy, check this option first. You don’t have to sell the policy to access cash.

Policy loan

If your policy has built up cash value, you can borrow against it. The loan accrues interest and reduces the death benefit if not repaid, but you keep the coverage. This is best when the need for cash is temporary and the death benefit still matters to your beneficiaries.

1035 exchange

Section 1035 of the tax code lets you exchange one life insurance policy for another (or for an annuity) without triggering tax on the gain. If your policy isn’t meeting your current needs but you still want coverage or want to convert to an annuity, a 1035 exchange may make more sense than a sale.

Retained death benefit settlement

A less common variant: instead of cashing out entirely, you transfer ownership and premium responsibility to a buyer, but retain a portion of the death benefit for your beneficiaries. The lump sum is smaller, but your family still gets something. Worth asking about if you want partial liquidity without fully giving up the legacy.

Convert before you sell

If you have a convertible term policy you’re thinking of selling, the conversion to a permanent policy almost always happens at closing anyway — but understanding it in advance helps you ask better questions. If your conversion deadline is approaching, don’t let it lapse before exploring a settlement; once the term expires, the value disappears.

Surrender

The fallback. You give the policy back to the insurer and take the cash surrender value. It’s almost always the lowest-value option for a policy that qualifies for a settlement, but it’s fast, simple, and doesn’t require sharing medical records. For very small policies where settlement broker fees would eat the upside, surrender can actually be the right answer.

Frequently Asked Questions

How long does a life settlement take?

From the day you submit your application to the day funds hit your account, expect two to four months. Underwriting and medical record collection are the slowest steps. Closing and ownership transfer add another two to three weeks once an offer is accepted.

Do I need a broker to sell my life insurance policy?

No, but most sellers get higher offers with one. A broker shops your policy to multiple licensed providers and creates competitive bidding. They charge a commission, typically taken from the offer. Going direct to a single provider is faster and avoids the fee, but you only see one bid.

Will I owe taxes on a life settlement?

Often, yes. Under IRS Revenue Ruling 2020-05, the portion of your payout up to total premiums paid is tax-free. Anything between that basis and your policy’s cash surrender value is ordinary income. Anything above the cash surrender value is long-term capital gain. Talk to a tax professional before closing.

Can I sell a term life insurance policy?

Usually only if it’s convertible to a permanent policy. Most life settlement companies will require the conversion before or at closing. Non-convertible term policies generally can’t be sold, with one exception: a viatical settlement is sometimes possible if the insured is terminally or chronically ill.

What happens to my coverage after I sell?

It ends from your perspective. The buyer becomes the policy owner and beneficiary, takes over all premium payments, and collects the death benefit when you die. Your original beneficiaries no longer have any claim to the proceeds, which is the single most important consequence to understand before selling.

Is the buyer notified when the insured dies?

Yes. Buyers periodically verify the insured’s status through tracking services and public records. They also typically ask for a contact, often a family member or attorney, who can notify them when the insured passes. The buyer then files the death claim with the insurance carrier.

How is the offer amount determined?

Buyers run a life expectancy estimate using your age and medical records, model the future premiums they’ll pay, apply a target rate of return, and discount the death benefit to present value. The shorter your life expectancy and the lower the policy’s premium load, the higher the offer.

Are life settlements regulated?

Yes. Most U.S. states regulate life settlements through their insurance departments. Providers and brokers must be licensed, contracts and disclosures are state-approved, and most states impose a two-year ownership waiting period before a policy can be sold, with exceptions for terminal or chronic illness.

What to Do Next

If you’ve gotten this far and a life settlement still looks like the right move, here’s a short list of next steps that will save you time and money.

1. Pull together your policy documents: the original contract, the most recent annual statement, and a current in-force illustration from the carrier.
2. Make a list of your current physicians and the medications you’re taking. The faster the records get gathered, the faster you close.
3. Decide broker or direct-to-provider. For most policies of $250,000 or more, a broker is the default.
4. If you go with a broker, get at least two — interview them, compare fee structures in writing, and pick the one whose process you understand.
5. Verify licensing on your state’s Department of Insurance website before signing anything.
6. Plan on getting at least two competing offers before accepting. The first offer is rarely the best one.
7. Loop in a tax professional before closing so the proceeds don’t surprise you in April.

One last thing. Don’t sign under pressure. The good offers are still good next week.