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Selling a Life Insurance Policy: How Life Settlements Work and What They Pay

A hand signing a document with a fountain pen, with a sticky note reading “Sell it?”.
Photo by Cytonn Photography on Unsplash

A life insurance policy that lapses pays nothing. Surrender it and you get the cash value, minus any charge. There's a third way out, regulated in 43 states and Puerto Rico: selling the policy to a licensed buyer. Owners who sold in 2025 got almost nine times the surrender value, by the buyers' own trade group's count. Most policies won't qualify, though, and a lapse can't be undone.

See the eight steps and the tax bill

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By Margaret Linwood · Updated Sep 29, 2026 · Reviewed against IRS, NAIC, state insurance regulators, LISA market data

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Take that average with a grain of salt. It describes the policies buyers wanted: big ones, on older people, often in poor health. More than 9 million policies are surrendered or lapse every year, and fewer than 3,000 get sold.

Buyers are investors. They estimate how long they'll pay premiums before they collect, and that decides who gets an offer and how big it is. If the premiums are affordable, keeping the policy is often the better result for the family. Before a sale, there may be in-between options an insurer won't bring up unless asked, and a tax bill plenty of sellers don't see coming.

See the options before you stop paying

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Five things to weigh before talking to a buyer

A settlement is a sale, and it's final. These come up before any money changes hands, and they're easier to handle if you've thought them through first.

  1. The beneficiaries lose the payout. Once the policy's sold, the family gets nothing from it. Tell them before you sell, not after.
  2. The offer can change. Bids rest on medical records and a life expectancy estimate. If a second estimate comes in longer, a buyer may cut its price or walk away, so keep paying premiums until the sale's done.
  3. Medical records travel. Policies often get resold to other investors, sometimes more than once. Ask who'll hold the records after the sale and how they're protected.
  4. Pressure and upfront fees. A single "take it today" offer is a red flag. The settlement association says sellers generally have no out-of-pocket costs, and a legitimate buyer expects you to compare.
  5. A pitch to buy a new policy just to sell it. That's stranger-originated life insurance. An insurer can challenge the policy and leave you tangled up in a fraud claim.

None of that tells you whether a sale beats the other choices. The article covers what settlements pay, the steps in order and how the proceeds get taxed.

See who can sell, and who can't

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