Selling Your Term Life Insurance Policy: What You Need to Know

If you are sitting there thinking I want to sell my term life insurance policy, you are not alone. Plenty of people find themselves holding term coverage they no longer need or can no longer afford. Maybe the kids are grown. Maybe the mortgage is paid off. Maybe the premiums just do not fit the budget anymore. Whatever the reason, you are wondering if you can turn that policy into cash instead of just letting it disappear.

The short answer is yes, you can sell a term policy. But the longer answer is more complicated than that, and the complications matter. Term life works differently than permanent coverage, which means the evaluation process is different too. Let me walk you through exactly how this works, what your options are, and whether selling makes more sense than simply canceling.

The Basic Problem with Term Life Insurance

Here is the fundamental issue. Term life policies are designed to expire. That is literally what the word term means. You buy coverage for a specific period, say 10, 20, or 30 years (thanks to Jack the insurance agent- he said you need to protect your loved ones), and when that period ends, so does the policy. If you are still alive when the term runs out, nobody gets anything. No death benefit. No cash value. Nothing.

This is completely different from other types of life insurance, like whole life or universal life policies. Those policies are designed to last your entire lifetime and they build up cash value along the way. When you cancel a permanent policy, you can surrender it and walk away with that accumulated cash value. Not a great deal usually, but at least you get something.

Term life insurance does not work that way. There is no cash value building up inside your policy. Every premium payment you make goes toward the cost of the death benefit coverage for that period. If you cancel your term life coverage, you get nothing back. Zero. All those years of premium payments? Gone.

This is why the question of selling versus canceling matters so much with term life insurance. Canceling gets you nothing. Selling might get you something. The difference could be tens of thousands of dollars.

Can You Cancel Term Life Insurance Anytime?

Yes, you can cancel term life insurance anytime you want. There is no penalty, no fee, no surrender charge. You simply stop paying premiums and the policy lapses, or you contact the insurance company and formally cancel it. Either way, the coverage ends and you owe nothing more.

But here is what happens if you cancel a term life policy: you walk away empty handed. Unlike permanent policies with cash surrender values, term policies have nothing to give back. The insurance company keeps all the premiums you paid over the years, and you keep nothing.

This is perfectly legal and exactly how the product is designed. Term insurance is pure protection with no savings component. You were paying for coverage, you received that coverage for as long as you paid, and now it is over. The carrier does not owe you anything.

For many people, that is fine. They bought term coverage to protect their family during their working years, the working years are over, and they no longer need the coverage. Canceling makes sense.

But for others, especially those who might qualify to sell their policy, walking away with nothing feels like leaving money on the table. And it might be.

Selling Term Life Insurance for Cash

So can you actually sell a term life insurance policy for a lump sum cash payment? Yes, but with a big asterisk.

The life settlement market, which is the industry that buys life insurance policies from consumers, strongly prefers permanent policies. The reason is simple economics. When an investor buys your policy, they are taking over the premium payments and waiting to collect the death benefit when you pass away. With a permanent policy, that death benefit is guaranteed to pay out eventually as long as premiums are maintained. With a term policy, there is a deadline. If the term expires while you are still alive, the investor gets nothing.

That risk makes term policies much less attractive to buyers. But less attractive does not mean impossible to sell.

The Conversion Rider Changes Everything

The key to selling a term life insurance policy is something called a conversion rider. This is a provision in many term policies that allows you to convert the term coverage into permanent coverage without taking a new medical exam.

If your term policy has a conversion rider, and most quality term policies do, then you or a buyer can convert it to a whole life insurance policy or to universal life insurance. Once converted, the policy becomes permanent coverage with a guaranteed death benefit. That makes it dramatically more valuable to life settlement investors.

Here is how this plays out in practice. An investor evaluates your term policy and sees the conversion option. They purchase the policy from you, convert it to permanent coverage, and then hold it until the death benefit pays out. The conversion rider is what makes the whole transaction feasible.

Without a conversion rider, selling a term policy is much harder. Some providers will still buy non convertible term policies, but the pool of interested buyers shrinks considerably and the offers will reflect that reduced demand.

If you are thinking about selling your term policy, the first thing you should do is check whether your policy has a conversion rider. Look through your policy documents or call your insurance company directly. This single feature largely determines whether you have a sellable asset or not.

Companies Who Buy Term Life Insurance Policies

The companies that buy term life insurance policies are the same ones that buy permanent policies. They are called life settlement providers, and they must be licensed in the states where they operate. This is a regulated industry with consumer protections in place.

Some life settlement providers work with institutional investors like hedge funds and pension funds. Others buy policies for their own portfolios. Either way, they are looking for policies that meet certain criteria and offer acceptable returns on their investment.

When evaluating a term policy, buyers look at several factors. First is the conversion option I already mentioned. Second is the policy's face value. Bigger policies are more attractive because the economics work better. Third is your age and health. Older policyholders with health impairments represent shorter expected holding periods for buyers, which improves their returns.

A typical term candidate might be someone over 65 with a convertible term policy worth at least $100,000 who has some health conditions that reduce their life expectancy. If you fit that profile, there is a reasonable chance you can find a buyer for your policy.

If you are younger, healthier, or have a smaller policy, your options are more limited. That does not mean selling is impossible, but you should have realistic expectations about whether buyers will be interested and what kind of offers you might receive.

The Life Settlement Process for Term Policies

The process of selling a term life insurance policy works similarly to selling a permanent policy, with a few additional steps related to conversion.

First, you provide information about your policy and your health to a life settlement provider or broker. They will want to see your policy documents to verify coverage details and check for the conversion rider. They will also need access to your medical records to estimate your life expectancy.

Second, if you are working with a broker, they will shop your policy to multiple buyers to get competitive offers. If you are working directly with a provider, they will evaluate the policy themselves and make an offer if interested.

Third, and this is specific to term policies, the buyer will factor in the cost of conversion. Converting a term policy to permanent coverage increases the premiums significantly. The buyer has to account for those higher premiums when calculating what they are willing to pay you.

Fourth, if you receive and accept an offer, you sign paperwork transferring ownership of the policy. The buyer takes over, handles the conversion, starts paying the new higher premiums, and eventually collects the death benefit.

The timeline is typically two to four months from start to finish, though term policy sales can sometimes take longer due to the additional complexity of evaluating conversion options.

Selling vs Canceling: The Real Math

Let me put some concrete numbers around this so you can see why selling matters.

Say you have a 20 year term policy with a $500,000 death benefit. You have been paying premiums for 15 years and you are now 70 years old with some health issues. The term has five years left before it expires.

If you cancel, you get nothing. Five years of remaining coverage disappear and all those premiums you paid over 15 years are gone forever.

If you sell, and your policy qualifies, you might receive $30,000, $50,000, or even more depending on your specific situation. That is real money that could pay for healthcare, supplement retirement income, or just make life a little easier.

The difference between zero and $50,000 is not trivial. Even if the offer is lower than you hoped, something is almost always better than nothing.

Now, not every term policy will attract buyers. If you are 55 and healthy with a small policy, you probably cannot sell it. But if you are older with health issues and a substantial policy, selling could put significant cash in your pocket instead of walking away empty handed.

Accelerated Death Benefit: Another Option

Before you decide to sell your term policy, you should know about another option that might apply to your situation: the accelerated death benefit.

Many term life insurance policies include an accelerated death benefit rider. This feature allows you to access a portion of your death benefit while you are still alive if you meet certain conditions, typically a terminal illness diagnosis with a life expectancy of 12 to 24 months or less.

If you qualify for an accelerated death benefit, you can receive part of your death benefit now to pay for medical care, hospice, or other end of life expenses. Your beneficiaries would then receive the remaining death benefit when you pass away.

The accelerated death benefit is not the same as selling your policy. You are not transferring ownership to a third party. You are simply accessing your own death benefit early under the terms of your policy. The insurance company pays you directly.

This option is worth exploring if you have a terminal diagnosis. In some cases, the accelerated death benefit might provide more money than a life settlement, and it might be faster and simpler to access. However, if you do not meet the terminal illness requirements, this option is not available to you.

What About Viatical Settlements?

If you are terminally ill, you have another viable option beyond the accelerated death benefit: a viatical settlement. This is essentially a life settlement transaction for people with terminal diagnoses.

Viatical settlements work the same way as regular life settlements. You sell your policy to a third party investor, who take over ownership of the policy, including taking over premium payments and eventually collects the death benefit, generally in return for immediate cash. The difference is that viatical settlements are specifically designed for people with limited life expectancy, and they typically pay a higher percentage of the death benefit because the investor expects a shorter holding period.

Viatical settlements are available for term policies just like they are for permanent policies. If you are terminally ill and have a term policy, this might be an option worth exploring, though you should also compare it to your accelerated death benefit if your policy has one.

Tax Implications of Selling Term Life Insurance

If you sell your term life insurance policy, you will probably owe taxes on the proceeds. Here is how it works. For a complete breakdown of life insurance taxation across all scenarios, see our detailed guide.

The IRS treats life settlement proceeds in a specific way. First, any portion of the proceeds up to the total premiums you paid is generally tax free. That is considered a return of your own money. Second, any amount above your total premiums but below the policy's cash surrender value is taxed as ordinary income. Since term policies have no cash surrender value, this middle tier usually does not apply. Third, any amount above both your premiums and the cash surrender value is taxed as capital gains.

For most term policy sales, you are looking at either tax free recovery of premiums or capital gains treatment on the excess. But tax situations vary, and you should absolutely consult a tax professional before finalizing any sale. The last thing you want is a surprise tax bill that eats into your proceeds.

Other Things to Consider

Beyond income taxes and other lovely forms of tax, there are a few other factors to think about before selling your term life insurance policy.

First, consider your beneficiaries. Once you sell the policy, your family no longer receives a death benefit when you pass away. If people are depending on that coverage, selling might not be the right choice.

Second, consider public assistance eligibility. The cash you receive from selling your policy could affect your eligibility for Medicaid or other means tested programs. If you are receiving or expecting to receive public assistance, check how a life settlement would impact your benefits.

Third, consider creditor access. Depending on your state and situation, the proceeds from a life settlement might be accessible to creditors. If you have significant debts, this could be a factor.

Fourth, consider alternatives. Before selling, explore whether you have other options like reducing your coverage in exchange for lower premiums, converting to a smaller permanent life insurance policy, or simply letting the policy lapse if you truly no longer need coverage.

How to Get Started

If you want are considering going ahead with the act of selling term life insurance policies (or one policy), here is what to do.

First, dig out your policy documents and check for a conversion rider. This is the most important factor in determining whether your policy is sellable.

Second, gather basic information about your policy including the death benefit amount, the remaining term, your current premiums, and the name of the insurance company. Also gather basic health status and medical records to help the underwriting process move faster. Run the case in a life settlement calculator to see what your policy is actually worth. Even if a rough estimate, it will give you a good direction.

Third, contact a life settlement company (can be either a provider or broker) for a free evaluation. They will tell you whether your policy is likely to attract buyers and give you a preliminary sense of value.

Fourth, if you receive offers, compare them carefully. Make sure you understand the tax implications and any fees involved and make an informed decision.

Fifth, consult with a financial advisor or tax professional before making a final decision. Selling a life insurance policy is a significant financial move and you want to make sure it is the right one for your situation.

The Bottom Line

Yes, you can sell your term life insurance policy for cash, but it depends on your specific circumstances. Policies with conversion riders are much easier to sell. Older policyholders with health impairments are more attractive to buyers. Larger death benefits generate more interest.

If you are thinking about canceling your term policy, stop and consider selling it first. Canceling gets you nothing. Selling might get you something substantial. Even a modest offer is infinitely better than zero.

The only way to know what your policy is worth is to get it evaluated. It costs nothing to find out, and the answer might surprise you.

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute legal, financial, or professional advice. Life settlement regulations vary by state, and this content should not be relied upon as a substitute for consultation with a licensed professional. Please consult with a qualified attorney, financial advisor, or licensed life settlement broker in order to make an informed decision regarding the sale of a life insurance policy.