Life Settlements: How Selling a Policy Works and What to Watch For

If you no longer need a life insurance policy, or can no longer afford it, you may hear that you can sell it for more than the insurer would pay you to surrender it. That transaction is a life settlement, and it is a legitimate, regulated option in many states.

It is also a complicated one. Selling a policy ends your beneficiaries' claim to the death benefit, hands an investor a financial interest in your death, and can carry high fees, tax bills and effects on public benefits. Regulators have published a fairly consistent set of cautions, gathered here.

This guide is general information, not financial, insurance, tax or legal advice. Before you sell, talk with your state insurance department, a tax professional and, ideally, an attorney who works for you rather than for a buyer.

What a life settlement is

The NAIC's life insurance consumer page defines a life settlement as the sale of a life insurance policy to a third party for a cash payment that is less than the full amount of the death benefit. FINRA's 2023 investor insight on life settlements says such payments are generally more than the policy's cash surrender value and less than the net death benefit.

The buyer, often called a life settlement provider, becomes the owner, pays the remaining premiums and collects the death benefit when the insured person dies. FINRA notes that providers may hold policies or resell them, individually or in bundles, to other investors.

A viatical settlement is the related sale by someone who is terminally or chronically ill. As of October 2026, the Illinois Department of Insurance defines a terminal illness for this purpose as one a physician certifies is reasonably expected to result in death within 24 months. Some states, Illinois among them, regulate both kinds of sale under one viatical settlement law.

How offers are priced

Price depends mainly on the insured person's age and health, the death benefit and the premiums the buyer will have to keep paying. The Texas Department of Insurance's life insurance guide (updated December 2025) says providers pay more for policies when the insured has a shorter life expectancy and for policies with lower premiums, and that sale amounts typically range from 10% to 75% of the death benefit. Its consumer tip on selling a policy (also updated December 2025) says you'll probably need a policy of at least $100,000 and be over 65 to sell.

FINRA's 2023 insight says one of the hardest things to know when selling a policy is whether you're getting a fair price. Its advice is to shop around, either by contacting several life settlement companies or by using a licensed life settlement broker, and to find out whether the person you're dealing with represents you or a particular buyer.

Costs and consequences

• Commissions. FINRA's 2023 insight warns that life settlements can have high transaction costs and that those who sell them can receive hefty commissions. Ask what everyone involved is being paid, and by whom.
• Taxes. Settlement proceeds may be taxable. IRS Publication 525 (2025) explains that certain viatical settlement amounts are excluded from income when the insured is terminally or chronically ill and the buyer meets federal requirements. Outside that situation, get tax advice before you sign.
• Public benefits and creditors. The Texas Department of Insurance warns that money from a sale could disqualify you from Medicaid and other public assistance and might not be exempt from creditors.
• Your survivors. Your beneficiaries won't receive the death benefit. If you later want new coverage, FINRA notes it may cost more because of your age or health.
• Privacy. You'll sign releases for your medical and personal information, and the buyer may share it with lenders or investors. As of October 2026, Illinois lets buyers contact you about your health once every three months if your life expectancy is more than one year, or monthly if it's one year or less.

How states regulate settlements

States license and supervise this market, and the rules vary.

• Licensing. The Texas Department of Insurance says companies that buy policies in Texas must be licensed with it. The California Department of Insurance says life settlement brokers and providers must be licensed by the Insurance Commissioner under California Insurance Code sections 10113.1 through 10113.3.
• Disclosures and rescission. As of October 2026, the Illinois Department of Insurance lists required disclosures, including that alternatives exist, that proceeds may be taxable or reachable by creditors, and that the broker owes you a fiduciary duty. Illinois also gives you the right to rescind before the earlier of 30 calendar days after the contract is signed by all parties or 15 calendar days after you're paid.
• Timing limits. As of October 2026, Illinois says that since July 1, 2010, it has been a violation of its law to enter a settlement within two years after a policy is issued unless specific conditions are met, such as the insured being terminally or chronically ill.

Check your own state's rules with its insurance department. For variable life insurance, FINRA notes that variable life settlements are securities transactions subject to federal securities laws and FINRA rules.

Scams and pressure to watch for

The Illinois Department of Insurance warns that if someone offers you "free," "no cost" or "zero premium" life insurance, you may be the subject of an illegal scam, and it points consumers to its information on stranger-originated life insurance. The Texas Department of Insurance's tip on selling a policy (updated December 2025) likewise tells consumers to beware of scams and to check a buyer's license before selling.

FINRA also warns about high-pressure sales tactics and says a legitimate investment professional will give you the time you need to make an informed decision.

Check the alternatives first

Regulators consistently suggest comparing a settlement with other ways to get value from a policy:

• Borrowing against the policy's cash value.
• Withdrawing cash value or surrendering the policy, though early surrender charges may apply.
• Accelerated death benefits, which can prepay part of the death benefit if you meet the policy's illness requirements.
• Reducing coverage, or a 1035 exchange if your goal is to keep coverage with different features.

If you go ahead, deal only with licensed providers and brokers, get multiple offers in writing, read every disclosure and keep copies.

Key takeaways

• A life settlement sells your policy to a third party, typically for more than its cash surrender value but less than its death benefit.
• Offers depend heavily on age, health and premiums, and it can be hard to know whether a price is fair, so compare several written offers.
• Fees can be high, and proceeds can affect taxes, Medicaid eligibility and creditor claims.
• States license providers and brokers and set disclosure, rescission and timing rules; verify licenses with your state insurance department.
• Offers of "free" or "no cost" life insurance tied to selling the policy are a warning sign of an illegal scheme.

Sources

• National Association of Insurance Commissioners, Life Insurance consumer page
• FINRA, What You Should Know About Life Settlements (July 31, 2023)
• Texas Department of Insurance, Can I sell my life insurance policy? (updated December 12, 2025)
• Texas Department of Insurance, Life insurance guide (updated December 12, 2025)
• Illinois Department of Insurance, Viatical Settlements, Accelerated Death Benefits
• California Department of Insurance, Life Settlements
• Internal Revenue Service, Publication 525, Taxable and Nontaxable Income (2025)